Pandemic and debt to fuel political instability

Verisk Maplecroft’s Political Stability Index projections show that 88 countries out of the 130 assessed are likely to experience more instability by 2023, as trust in government legitimacy falls and civil unrest rises.

Extreme societal and economic stresses, stoked by the pandemic, will be the primary drivers of risk across a wide range of countries.

However, the index pinpoints a group of 23 nations, largely made up of emerging markets, where greater levels of political upheaval and unrest are most likely to materialise, including in Brazil, the Philippines, Saudi Arabia and Ukraine. These countries feature heavily among the 23 nations with the highest declines in their Political Stability Index scores.

Their leaders have a tougher job of managing the politics of a crisis that is having a highly regressive impact on health and livelihoods. As is also the case with their developed-market counterparts, many have done so badly in curbing the spread of Covid-19 that public trust in government has diminished significantly.

Disruption ahead

Depending on where and how hard it strikes, instability could at best stymie policymaking or make it less predictable, or erode countries’ ESG profiles. At worst, instability could disrupt all but the most resilient firms, force governments into default, or block crucial trade and commodity flows.

Verisk Maplecroft flags the fading legitimacy of governments and intensifying civil unrest as the central drivers of risk. In countries where political powerbrokers are struggling to engineer economic recoveries, answer for the human toll of the pandemic, or are falling victim to internal political divisions, the risk will be particularly high.

Another key culprit for the expected global increase in political risk is the extraordinary credit binge seen in 2020 by leaders desperate to keep their economies afloat. 84 countries in Verisk Maplecroft’s Public Debt Index saw exceptional increases in their debt-to-GDP ratios of at least 10 percentage points last year.

“Servicing higher debt burdens will have the highest potential to drive discontent by constraining social spending and fiscal stimuli, and that’s without even factoring in the risk of any abrupt change from central bankers in developed markets.” says Verisk Maplecroft’s head of market risk, James Lockhart Smith. “While this isn’t yet our base case, despite recent bond market jitters, the latter would trigger a major withdrawal of capital across emerging and frontier markets.”

Firms and investors with exposure to seemingly calmer authoritarian countries – many of which are staples of emerging market debt portfolios and supply key global commodities – should worry most about the high impact, low probability tail risks that are also captured by the Political Stability Index.

Verisk Maplecroft expects risks of this kind to be highest in the Gulf. Markets are pricing Saudi Arabia, Kuwait, Qatar and Bahrain favourably thanks to their perceived comparative advantage in low-cost fossil fuel production, credit risk profiles and their ability to repress civil discontent. Yet, index projections show their fragility. This stems from the lack of effective mechanisms for channelling discontent, which makes dramatic bouts of civil unrest more likely over the long term.

Saudi Arabia stands out with a 4.9% probability of seeing a drastic decline in political stability by 2023-Q1. The kingdom ranks second-highest risk in the dataset after Azerbaijan in terms of the combined probability and magnitude of such outcomes.

“Watch out for non-contagious instability in the most indebted emerging markets, especially weak democracies, and the further erosion of political institutions in some European countries,” adds Lockhart Smith. “And don’t overlook the elevated risk of left-tail destabilisation in major authoritarian political systems. We might be done with 2020, but 2020 isn’t done with us.”