Risk Uprising: Navigating Today's Political Turmoil

By Hodge, Neil | Risk Management, May 2017 | Go to article overview

Risk Uprising: Navigating Today's Political Turmoil


Hodge, Neil, Risk Management


IN MARCH 2016, the Economist Intelligence Unit rated the possibility of a Donald Trump presidency as one of the top 10 risks facing the world--riskier even than the U.K. leaving the European Union, and just as unlikely. Judging impact and probability on a scale of one to 25, with 25 considered the most dangerous, the analysis rated the possibility of a Trump victory a 12--the same level of risk as "jihadi terrorism destabilizing the global economy" and slightly higher than Brexit and an armed clash in the South China Sea, both of which it gave an eight.

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Now, of course, the U.K. is on track to exit the EU and President Trump is sitting in the White House, demonstrating just how unreliable political forecasting has become. Furthermore, the Brexit vote and Trump's election show that monumental political change is not isolated to volatile developing countries where governments can change in the blink of an eye--it can happen in the world's largest economies as well.

"While both of these events were on the horizon last year, no one predicted that they would turn out quite as they have," said Keith Ricketts, vice president of marketing at sof tware provider Sword Active Risk. "After the financial challenges of 2008 and the global recession, there was a feeling that many markets were getting back to a more even keel. This is a stark reminder that unexpected events beyond the control of companies can come out of the blue and have a dramatic impact."

More political changes could be on the way this year. In Europe, while Article 50 has been invoked, plans for Brexit are still taking shape. France will elect a new president later this year, and Angela Merkel is up for re-election as German chancellor. In both countries, populist, right-wing, anti-immigration and anti-EU parties have gained unusual levels of support. There are also key general elections throughout South America, where a change of political party in of fice can of ten mean preparing for polar-opposite economic and business policies, while the Middle East continues to be as fractious and tense as ever with terrorism threats from ISIS and other extremists.

"If recent changes in the global political landscape have demonstrated anything, it is that black swans are everywhere and comfort zones don't work," said Ladd Muzzy, principal at Nasdaq BWise, a governance, risk and compliance management (GRC) sof tware provider. "The task of risk management is to consider all scenarios. How many of us really considered the extremes? With major elections in Europe coming up this year and populism resetting the political parameters, nothing can be ruled out, and for risk managers, black swans have to be the new normal."

MAINTAINING PERSPECTIVE

Political risk analysts at the Eurasia Group predicted in January that 2017 would be the "most volatile" year for political risk since World War II. While international war or "the breakdown of major central government institutions" isn't inevitable, the firm said, "such an outcome is now thinkable." According to the Eurasia Group's research, U.S. unilateralism and the country's retreat from its leading role in world affairs and institutions like NATO is the key political risk for 2017, with China's scheduled leadership transition coming in second. Lack of global economic reform to stimulate growth and potential political inference in central bank decision-making also pose serious risks.

While the world may seem a more uncertain place, experts believe it is important to maintain perspective. "Organizations must not panic--nothing is going to happen overnight," said James Pothecary, risk analyst at political risk consultancy Allan & Associates. "It is important to keep a level head and not make any major business decisions quickly because of political change, such as relocating of fices to another country, or pulling investment out of a country. …

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