An update on the political landscape in the region
The COVID-19 pandemic continues to have widespread political, economic, and social effects on Latin America.
The effects of the pandemic, several years of falling commodity prices, and endemic weaknesses that were debilitating the real economy have damaged the social fabric and are now diminishing the region's potential. The gap between Latin American economies, and the emerging markets as a whole, widened dramatically in 2020, and is projected to expand further in 2021 and 2022, threatening social and political spaces.
In this 8-minute video, we provide an update on the current political landscape in the region, and what to expect in terms of political risks:
Insurance-backed political risk solutions can help enable growth that will fuel and sustain the recovery from COVID-19.
Firstly, it is important to understand what political risk comprises. Political risk is the probability of disruption to the operations of multinational enterprises by political forces or events, whether they occur in host countries, or result from changes in the international environment. Some examples would be:
- Political violence causing physical damage to an asset, the prolonged inability to access the asset, or even the eventual need to abandon the asset in question. Examples of political violence are civil war, coup d’États, insurrections, revolutions, strikes and riots, sabotage, and terrorism.
- Government interference, such as expropriation, or a unilateral approach to the renegotiation of concessions or contracts.
- The withdrawal or cancellation of already-issued permits and licenses, and the imposition of sanctions or currency restrictions.
- The requirement for corporates or financial institutions to divest themselves of assets in a certain country.
The effects of these scenarios would be financial loss, and the way in which a loss caused by a political risk event appears on a client’s balance sheet will vary, depending on the nature of the asset in question. Such losses could be shown as an investment loss or a trading loss. The point to remember is that a loss would occur, but the insurance policy is set up to respond to this, and indemnify the client. Political risk can affect clients in different ways, depending on their sector of activity.
We also offer other solutions relevant in the context of elevated political risk. The difference is that credit insurance products would respond to default or non-performance, regardless of the cause (in other words, these insurance products do not require a linkage to a specified political risk peril). Accordingly, clients can have an interest in using either credit insurance (covering the risk of non-payment) or surety (covering the risk of non-performance) to manage country exposures. In this context:
- Credit insurance can serve as a bridge to enable future financing, by giving lenders the necessary comfort relative to their debt exposure, thereby enabling projects to go forward, and allowing their equity investors to realize their objectives as well.
- Trade credit coverage can strengthen global supply chains, helping key suppliers through improved payment terms.
- Commercial and bank surety can replace cash and/or letters of credit used as collateral by corporate clients, releasing capacity to fund growth.
Political risk, surety, and credit insurance products are widely available to meet risk management needs in many scenarios.