Political Risk Could Undermine the Global Recovery. Review Dun & Bradstreet's research on global trade and the political risks that could impair global economic outlook. Dun & Bradstreet partners with international finance departments, World Bank Governance Indicator publications, and other global economic outlook experts to create comprehensive fiscal world view.
2. 2018 Global Economic Outlook
Political Risk Could Undermine the Global Recovery
COUNTRY INSIGHT SERVICES
Wednesday 29th November 2017
A DUN & BRADSTREET SPECIAL BRIEFING
3. Why is Country Insight Important?
Economic downturns, political upheaval, and natural disasters can all have an impact on global trade.
Unrest can result in overnight barriers to imports, added taxes to exports, piracy activity in key shipping lanes, and
other substantial obstacles to global business.
D&B Country Insight provides comprehensive analysis on over 130 individual countries that account for more than
95%
of the global GDP, helping you understand:
• Political Risk: How stable is the country’s government?
• Economic Risk: Is the economy expanding or contracting?
• External Risk: Is the currency stable or unstable?
• Commercial Risk: Will I get paid and how quickly?
• Trade Environment: Have import regulations changed?
3Follow us @DnBUS | @DnBUKTeam
4. Agend
a
Global Recovery Update
Special Focus: Political Risk
North America
Western Europe
Eastern Europe & Central Asia
Latin America
Asia-Pacific
Middle East & North Africa
Q&A
5. Political Risk is Increasing…
Follow us @DnBUS | @DnBUKTeam 5
Rank Region Risk
Likelihood
(%)
Global
Impact
(1-5)
1 Pan-regional
Rapidly growing cyber-dependence and
connectivity lead to increasingly frequent and
more damaging cyber incidents, with global
ramifications.
90 3
2
Middle East
& North
Africa
The crackdown by the Crown Prince in Saudi
Arabia leads to an increase in social
tensions, which disrupts oil supplies and
pushes the global oil price above USD80/b.
50 2
3
North
America
Shifts in trade policy by the US and its
withdrawal from multilateral agreements
impacts global trade flows as other countries
re-evaluate their own stance and cultivate
new partnerships.
40 4
4
North
America
The Federal Reserve raises rates too fast, to
pre-empt inflationary pressures, choking US
expansion and heightening volatility in the
currency markets.
35 2
=5
Middle East
& North
Africa
Saudi-Iranian tensions lead to actual military
conflict between the countries, in which oil
installations are targeted, boosting oil prices
to USD120/b.
25 3
=5
Latin
America
Mexico's rejection of the US's NAFTA
proposals in the fifth round of talks pushes
approval of a new deal (if agreed) to the
tenure of the incoming president, who rejects
the deal, leading to the collapse of NAFTA.
50 2
6. Global Business Impact
Follow us @DnBUS | @DnBUKTeam 6
Source: Dun & Bradstreet
274
226
265
283
272
250
254
260
231 230
235
243
281
225 222
239
228
200
220
240
260
280
300
Q32013
Q12014
Q22014
Q32014
Q42014
Q12015
Q22015
Q32015
Q42015
Q12016
Q22016
Q32016
Q42016
Q12017
Q22017
Q32017
Q42017
Quarterly GBI score
Average GBI Score (248.1)
Global Business Impact Score
7. 7
… and is One of the Main Pillars of our Approach
A comparative, cross-border assessment of
country risk and opportunity
for 132 countries globally
D&B
COUNTRY
RISK
POLITICAL
ENVIRONMENT
COMMERCIAL
ENVIRONMENT
ECONOMIC
ENVIRONMENT
• Scores & Forecasting
• Reporting, Commentary &
Recommendations
• Integration with D&B company
intelligence
Follow us @DnBUS | @DnBUKTeam
8. 88
Country Risk Scores
The D&B Country Risk Score:
A unique and comparative,
cross-border assessment of the
operational risk of doing
business in a country, distilled
into a single, unique rating
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High
Level
Granula
r Level
Granular Scores for specific
use cases:
Provide a drill-down on key
areas of interest according to
use-case
9. The Role of Political Risk in
D&B Country Risk Scores
10. 10Follow us @DnBUS | @DnBUKTeam
What Do We Mean by Political Risk?
• Government policies
• Political system
• Powerful interest groups
• Decentralisation
• Radical groups
• External threats
11. 11
Reasons for Changes to Risk Score: 2012-2017
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* Until End of September 2017
Source: Dun & Bradstreet
Reason 2012 2013 2014 2015 2016 2017 * Total
% of
Change
Politics 15 12 18 10 9 13 77 33.33
Economics 18 17 26 19 22 9 111 48.05
Combined 17 5 5 5 5 3 40 17.32
Natural Disaster 0 1 0 2 0 0 3 1.30
Total 50 35 49 36 36 25 231 100
12. 12
Political Factors Impact Downgrades More Than
Upgrades
* Until end of September 2017
Source: Dun & Bradstreet
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Reason for Change
Downgrades Upgrades
Number % Number %
Politics 56 38.36 21 24.7
Economics 57 39.04 54 63.5
Combined 30 20.55 10 11.8
Natural Disaster 3 2.05 0 0.00
Total 146 100 85 100
13. 13
Regional Differences
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8
20
8
8
36
6
Downgrades
Latin America
Western & Central Europe
1
9
64
8
3
Upgrades
Asia Pacific
Middle East & North Africa
14. 14
Political Risk Was Falling in MENA, But…
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* To end of September 2017
0
2
4
6
8
10
12
2012 2013 2014 2015 2016 2017*
Downgrades Upgrades
15. 15
Political Difficulties for the EU Rumble On
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* To end September
0
1
2
3
4
5
6
7
8
9
2012 2013 2014 2015 2016 2017*
Downgrades Upgrades
16. 16
Why is Political Risk Important?
• Capital inflows can slow or even reverse
• Pressure increases on the local currency
• Foreign currency borrowing becomes more expensive
• Bond spreads widen
• Imported inflationary pressures rise
• Interest rates subject to upward pressure
• The local stock market tends to fall
• Business partners demand stricter payment terms
• Access to credit can become more difficult
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18. Political Risk Mars an Otherwise Stable US
Outlook
As early as March 2017, we had downgraded the PE
Outlook from amber to red, indicating that political
risk is now a bigger impediment to operating risk
Overall Rating at DB2a (only 3 countries with higher
ratings)
But, rating outlook downgraded from ‘stable’ to
‘deteriorating’ on Sep 11,2017
Follow us @DnBUS | @DnBUKTeam 18
19. Policy Design that Ignores Business Cycle Risks
Has Long Run Consequences
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-10.0
-9.0
-8.0
-7.0
-6.0
-5.0
-4.0
-3.0
-2.0
-1.0
0.0
1.0
2.0
3.0
1986
1988
1990
1992
1994
1996
1998
2000
2002
2004
2006
2008
2010
2012
2014
2016
2018
2020
2022
2024
2026
Total Budget Balance, % of GDP
Projections
Deficits
Surpluses
Average Deficit, 1967 to 2016
Sources: Congressional Budget Office, Dun & Bradstreet
0.0
10.0
20.0
30.0
40.0
50.0
60.0
70.0
80.0
90.0
100.0
1986
1988
1990
1992
1994
1996
1998
2000
2002
2004
2006
2008
2010
2012
2014
2016
2018
2020
2022
2024
2026
Federal Debt Held by the Public, % of GDP
Projections
20. 20
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Canada
-50000
-40000
-30000
-20000
-10000
0
10000
20000
30000
1993 1995 1997 1999 2001 2003 2005 2007 2009 2011 2013 2015 2017
Source: Department of Finance Canada, Dun & Bradstreet
Canada: Federal Govt Budget Surplus[+]/Deficit[-] (SA, Mil.C$)
Initial projected budget deficit for the current fiscal year (Mil.C$) {March 2017}
-4.500
-2.500
-0.500
1.500
3.500
5.500
7.500
1993-Q1
1994-Q3
1996-Q1
1997-Q3
1999-Q1
2000-Q3
2002-Q1
2003-Q3
2005-Q1
2006-Q3
2008-Q1
2009-Q3
2011-Q1
2012-Q3
2014-Q1
2015-Q3
2017-Q1
Source: Statistics Canada
Contribution to Real GFCF Change: General Government: Total (%PT)
22. 22
The Economic Outlook is Improving
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• Most countries in the region posted robust growth figures in April-June, and recent data hints that positive economic
developments will last throughout 2018-19.
• Inflation rates remain low, albeit rising, amid an ongoing improvement in labour market conditions but still subdued wage growth
as a result of slack productivity growth.
23. 23
Risk of Late Payments is Generally Falling
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2007 2014 H2 2017
Europe 41.0% 37.6% 44.3%
Germany 53.9% 74.8% 64.6%
France 32.4% 38.3% 43.4%
UK 32.6% 24.1% 30.1%
Share of prompt payments as % of total payments (2007-2017)
Germany
Spain
France
Italy
Ireland
Share of prompt payments as % of total payments in H2 2017
Sources: Altares, Dun & Bradstreet
• The average prompt payment delay in the EU has fallen from 13.4 days in Q1 2017 to 13.2 days.
• However, significant differences remain across member states.
• Payment performance is likely to continue to improve throughout our forecast horizon: the gap between the best and the worst
performers will narrow, but differences will persist.
Sources: Altares, Dun & Bradstreet
24. 24Follow us @DnBUS | @DnBUKTeam
Nationalist politicians in the Eastern flank of the EU, especially in Poland and
Hungary, have defied EU laws by streamlining media, state-owned enterprises
and the judiciary.
The EU is already increasing political pressure as well as threatening to reduce
subsidies.
However, Political Risk is Rising Again
In Spain, the central government has taken de facto control of Catalonia by
triggering article 155 of the Spanish constitution.
Early elections have been called, but tension between the Catalan authorities and
the central government is set to remain elevated well beyond the vote.
In Italy, polls are in flux ahead of the general elections in early 2018.
We rule out an EU membership referendum even if anti-EU parties should win a
parliamentary majority.
26. 26
Subdued Growth Outlook Amid Slow Oil Price
Recovery
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Sources: Dun & Bradstreet, Haver Analytics
27. 27
Political Climate Snapshot
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Sources: Freedom House Nations in Transit 2017; Transparency International Corruption Perceptions Index 2016; World Bank Worldwide Governance Indicators 2017; Freedom House Freedom
in the World 2017; Dun & Bradstreet Calculations
Political Regime
Public sector
corruption
(Corruption
Perceptions Index
2016 Rank/176)
Government
Effectiveness
(Governance
Score: -2.5 to
+2.5)
Political Stability &
Absence of
Violence/Terrorism
(Governance Score: -
2.5 to +2.5)
Political
Rights
(1= Most Free;
7 = Least Free)
Civil
Liberties
(1= Most
Free; 7 =
Least Free)
Lithuania Consolidated Democracy 38 1.09 0.80 1 1
Latvia Consolidated Democracy 44 1.00 0.39 1 2
Romania Semi-Consolidated Democracy 57 -0.17 0.27 2 2
Bulgaria Semi-Consolidated Democracy 75 0.29 0.03 2 2
Georgia Transitional Government/Hybrid Regime 44 0.51 -0.29 3 3
Ukraine Transitional Government/Hybrid Regime 131 -0.58 -1.89 3 3
Belarus Consolidated Authoritarian Regime 79 -0.51 0.12 7 6
Azerbaijan Consolidated Authoritarian Regime 123 -0.16 -0.87 7 6
Kazakhstan Consolidated Authoritarian Regime 131 -0.06 0.04 7 5
Russia Consolidated Authoritarian Regime 131 -0.22 -0.89 7 6
Kyrgyz Republic Consolidated Authoritarian Regime 136 -0.90 -0.66 5 5
Tajikistan Consolidated Authoritarian Regime 151 -1.02 -0.79 7 6
Turkmenistan Consolidated Authoritarian Regime 154 -1.14 -0.31 7 7
Uzbekistan Consolidated Authoritarian Regime 156 -0.60 -0.34 7 7
28. 28
Key Political Risks
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Russia and the West: Rapprochement or Continuing Cold War 2.0?
• Sharp deterioration in relations over recent years, with a number of issues continuing to cause tension, including:
Russia’s revanchism (e.g. Ukraine & Georgia); Syria intervention, alleged election meddling and hostile cyber
activities
• No significant rapprochement expected over the coming years
Russia after Putin?
• Putin to win 2018 presidential election but is constitutionally barred from running in 2024
• No credible successor and opposition does not yet offer a viable alternative
Ukraine: Forwards, Backwards, or Perpetual Limbo?
• Oligarchic elite still controls the levers of power, and as such, vested interests remain a key impediment to
progress
• Political and economic progress could be stunted – or even reversed – if a less Western-leaning government
emerges in 2019
31. 31Follow us @DnBUS | @DnBUKTeam
Lower Tolerance for Corruption, Power
Grabs
…but perception still high
2014 2015 2016
Rank/174
countries
Score
*
Rank/167
countries
Score
Rank/176
countries
Score
Argentina
107 34 106 32 95 36
Brazil
69 43 76 38 79 40
Chile
21 73 23 70 24 66
Mexico
103 35 111 31 123 30
Uruguay
21 73 21 74 21 71
Venezuela
161 19 158 17 166 17
Source Transparency International Corruption Perceptions Index 2014-2016
*Score: 0 (highly corrupt) to 100 (very clean)
Business Impacts of Continued Discontent:
• Operational disruption
• New spotlight on corporate compliance
• Heavier fines for non-compliance, possibly
bankruptcy
• Longer project approval processes
• Divert efforts from structural reforms
• Higher probability of reputational damage
Recommendations:
• Conduct due diligence on third parties –
vendors/partners
• Ensure anti-corruption programs are designed to
prevent, expose and decisively respond to instances
of graft
• Also, ensure that policies and procedures are in
alignment with laws/guidelines in all jurisdictions.
• Plan for continuation of public protests; high degree
of discontent
32. 32Follow us @DnBUS | @DnBUKTeam
Domestic Politics Hardening Negotiating Positions
Sticking Points:
• A higher “local content” threshold for goods to enjoy tariff-free entry.
• Limit the number of US federal public works contracts that Canadian and Mexican firms could win
• A sunset clause which allows NAFTA to expire after 5 years if all members do not vote to continue
it
• Amendment to the dispute resolution mechanism specifically, curtailing investor- state dispute
settlement
• Eliminating mechanism which allows members to challenge others’ anti-dumping and counter-
vailing duty decisions before and independent panel.
33. 33Follow us @DnBUS | @DnBUKTeam
Uncertainties
Mexico
• Q4: Primaries
• New coalition ideologically discordant (PRD, PAN and MC –
Citizen’s Front for Mexico
• Independents (for the first time)
• Leftist front-runner – Lopez Obrador (currently)
• Embattled PRI
• End-Q1 2018 target to conclude talks/get an agreement
• 1 July 2018: Presidential election
• 1 December: Inauguration Day
Deal/No Deal
• PRI win: Deal = ratification; No deal = continued talks
• Citizen’s Front win: Deal = ratification; No deal = continued talks
likely
• Lopez Obrador win: Deal = possible renegotiation; No deal =
continued talks (possibly)
United States
• 30 June 2018: fast-tracking law ends
• Allows for approval/rejection of a deal (if struck) with a simple
majority
• Unless 3 year extension requested by President Trump
Recommendations
• Note the changing rhetoric – “There is life after NAFTA”
• Pay attention to new alliances/trade deals being explored by
Mexico
• Assess business implications if US-Mexico trade revert to WTO
rules
• Determine impact of reversion to US-Canada trade pact
35. 35
The Most Militarized Frontier in the World Abuts One
of The Largest Concentrations of Wealth In the World
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Map Source: Dun & Bradstreet
Map Vector Layers Source: geofabrik.de
Demilitarized Zone since
1953 Armistice
Size of proportional to population
36. 36
Analysis of cross-border shipping transactions
can scope supply chain risks
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3.2m Businesses nationally
52% in high-risk zone in artillery conflict
440,000 export shipments to US since 2015
25,000 US unique importers
18,000 South Korean suppliers
24% transactions with South Korea, with Seoul
22% South Korean suppliers based in Seoul
US consignees: CA 6k ($100k mean value)
NY 3k ($70k mean value)
TX 2k ($250k mean value)
Source: Dun & Bradstreet
37. 37
The demographic ‘war risk index’ does track
major national political crises – but not reliably
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Dun & Bradstreet version of index depends on ratio of male 15-24 year-olds to male 50-60 year-olds.
Source: United Nations, Department of Economic and Social Affairs, Population Division (2017).
World Population Prospects: The 2017 Revision, custom data acquired via website.
High war
index crisis
Low war
index crisis
38. 38
World
Arrived via India where centuries of co-existence with other, polytheistic religions encouraged tolerance
Affirmative action programs to target inequalities (Malaysia)
Popular mass movements that counter extremist thought (Indonesia)
Secular political leaders & focus on economic reform
Religion less relevant for regional powers (compared to Saudi Arabia, Israel, Iran)
Transition from colonialism bears less historical baggage
Democratic institutions resilient if imperfect, against autocracies and executive monarchies in Middle East
× Religious credentials increasingly important in politics (Malaysia, Indonesia)
× Schools & charities funded by Saudi Arabia; workers returned from Saudi Arabia proselytise (Malaysia, Indonesia)
× ISIS efforts (SE Asian ‘regiment’, social media efforts, use of region as training ground due to porous borders)
× Persuasive alternative narrative in regions without effective administration (Philippines)
× Political discontent reframed as religious struggle (Philippines, Thailand)
× Narrative of victimisation
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42. 42
High Political Risks
• Sunni Saudi Arabia vs Shi’a Iran
o Proxy wars in Yemen, Syria and Iraq
o Lebanon
• Washington vs Tehran
• Presence of radical groups including Islamic State and al-Qaeda
• Quartet vs Qatar
• Kurdish independence vote
• State of emergency’ in several countries
• All underpinned by a weak policy-making environment and corruption.
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Overall Rating at DB2a (only 3 countries with higher ratings)
But, rating outlook downgraded from ‘stable’ to ‘deteriorating’ on Sep 11,2017
Implementation risks high and could kill the rally in domestic business sentiment in anticipation of corporate tax reform, and deregulation leading to reduced to cost of operations
Administration must provide clear stance on key external policy areas like Protectionism (e.g. NAFTA, KORUS), WTO (in or out, or change it?) and generally speaking the pivot from Multilateralism to Bilateralism
As early as March 2017, we had downgraded the PE Outlook from amber to red, indicating that political risk is now a bigger impediment to operating risk