As the world continues to grapple with the pandemic, global political risk hit a multi-year high and is expected to persist in 2021. The performance of markets and companies will be impacted by events and conditions due to a combination of pandemic-related issues, climate change, trade tensions, political transitions and other factors. Without question, the top risk is COVID-19.
Pandemics are inherently geopolitical, involving issues such as global leadership, international cooperation and competition, and national security. The COVID-19 pandemic has become a political-risk event on an unprecedented global scale as well as a public health crisis, influencing all the top 10 risks identified by the EY Geostrategic Business group in a recent report, the EY 2021 Geostrategic Outlook.
In addition to coronavirus disease 2019 (COVID-19), the report discusses the geopolitical dynamics in the Indo-Pacific, the disentangling of US-China interdependence, European strategic autonomy, and the rise of neo-statism. Also identified are reinvigorated climate policy agendas, the geopolitics of technology and data, US policy realignment, the tipping point for emerging market debt and another wave of social unrest.
Furthermore, COVID-19 will continue to generate high levels of uncertainty as governments continue to rapidly develop pandemic response policies and innovate in real time. This uncertainty will challenge strategy development and execution, making it even more crucial for companies to dynamically monitor political risks for challenges as well as opportunities in the coming year.
POLITICAL RISKS IN 2021
Export controls, vaccine nationalism, domestic political consequences and restrictions on cross-border people movement will generate political risks in markets worldwide. This underscores the need to re-evaluate talent decisions, supply chains, and approaches towards building enterprise resilience. We should also anticipate that the geopolitics of data and technology will come to the fore, given that each country has different approaches to data privacy, technological standards, digital taxation efforts and antitrust enforcement. Companies with cross-border operations will increasingly need to evaluate how the standards in one of their markets will interact with the standards in the other markets within which they operate.
Significant trends in regulatory and policy changes will see the world entering an era of neo-statism. Neo-statism refers to state-controlled competition where the state takes on a more active role and may even intervene in driving certain industries within its economy. As the pandemic intensifies the focus on self-reliance, several countries may start to diversify supply chains or re-shore manufacturing, with governments deploying policy tools to not only support domestic production, but also take measures to make their chosen industries inherently more competitive.
With more countries announcing their carbon neutrality targets, ambitious climate policy agendas are also likely to be part of COVID-19 stimulus plans, particularly in light of the upcoming 2021 United Nations Climate Change Conference (COP26) in November.
Also coming into play are power politics among the EU, China and the US. The European Union (EU) will utilize its investment, industrial and trade policies as well as its ability to shape global standards to progress towards strategic autonomy. On the other hand, China and the US will continue to try disentangling their strategic interdependence amid their trade relationship, rival industrial policies, technological competition and friction regarding Chinese sovereignty.
President-elect Biden has also declared his incoming administration’s focus on environmental and industrial policies, with volatility likely in the areas of anti-trust, immigration and trade. Companies could expect production and supply chains in strategic sectors to shift more towards the US economy, while green industries will see expanded investment and growth opportunities.
Meanwhile, the global competition in the Indo-Pacific will likely cause more geopolitical instability. This is evinced by recent tensions between China and India, as well as Australia and China, with middle and major powers becoming more assertive in shaping geopolitics while balancing between US and China. Government interventions will also affect investment and growth strategies, while maritime policies may reconfigure global supply chains.
Moreover, emerging market debt may hit a tipping point in 2021, with funding vulnerabilities expected to be highest in large emerging markets such as Brazil, India, Mexico and South Africa. Key markets growth prospects may suffer as tax and financial burdens rise among companies. Despite international efforts at debt relief, debt resolution will likely to be complicated by geopolitical dynamics and COVID-19.
Finally, a potential wave of social unrest in the form of protests may bring more disruptions to business operations. Five primary issues likely to motivate protestors in 2021 include social justice, climate change, inequality, pandemic restrictions and governance issues. Heightened stakeholder expectations could also magnify reputational risks for companies.
MANAGING RISKS THROUGH GEOSTRATEGIC PRIORITIES
While the geostrategic considerations differ for each specific political risk, there are five overarching actions that business leaders may consider to manage such risks in 2021.
1. Actively monitor your company’s political risk environment. Make political risks part of the company’s risk radar and dynamically monitor them throughout the year. The debt situation in some large emerging markets and the US policy realignment will require constant monitoring as the year progresses.
2. Conduct in-depth and real-time assessments of identified risks. Model the impact of potential political risk events across key business functions such as supply chain, revenue, data and intellectual property, as well as regularly monitor the potential effects of evolving US-China relations. Moreover, the geopolitics of technology and data likewise warrant close assessment.
3. Create a culture of political risk management across the company. Too often, the identification, assessment, and management of political risk is siloed within various business functions, as revealed in the EY Geostrategy in Practice 2020 survey of global executives. Companies should establish cross-functional teams that will leverage on the lessons learned from ongoing COVID-19 crisis management. This fosters better communication and management of political risks arising from the pandemic and will build greater agility in company operations.
4. Engage your stakeholders in political risk management. Political intervention and public opinion will continue to target companies on a variety of issues, upon which companies must proactively engage their stakeholders. By leveraging on relationships with policymakers, employees, customers, non-governmental organizations, community groups, and other stakeholders, companies can potentially turn challenges from political risks into opportunities.
5. Make political risk analysis integral to strategic decisions. Scenario analyses about political risks can be used to quantify and capture the uncertainty associated with their trajectories in the coming years. These insights can better inform strategic decisions that include M&A, market entry and exit as well as other transactions. As an example, the state of the EU’s pursuit of strategic autonomy and the geopolitical dynamics in the Indo-Pacific in 2021 will likely affect the global business environment for several years to come.
THE NEED FOR A GEOSTRATEGY
The New Normal may have started in 2020, but it is poised to become even more disruptive in 2021, with the medium and long-term effects of the pandemic becoming more visible. It would therefore be advisable for companies to develop their own geostrategy — one that can help the business integrate political risk management into its operations, as well as into its broader risk management, governance and strategic analyses.
Let us look to 2021 with renewed strength, depth of purpose, and clarity of insight as we work to unmask the difficulties brought about by the disruptions happening now, focus on the work to be done Next in order to recover, and keep our eyes on the vision of building and restoring long-term value to our businesses in the world beyond the pandemic.
Allow me to take this opportunity to thank the readers of Suits the C-Suite, a thought leadership column regularly published by SGV & Co. since 2009. On behalf of our partners, principals and staff who have contributed to this column, I wish you all a New Year filled with hope and peace.
This article is for general information only and is not a substitute for professional advice where the facts and circumstances warrant. The views and opinions expressed above are those of the author and do not necessarily represent the views of SGV & Co.
Wilson P. Tan is the Country Managing Partner of SGV & Co.