Difference between revisions of "Political Risk"

From Open Risk Manual
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== Definition ==  
 
== Definition ==  
 
'''Political Risk''' is the possibility that the political environment in which a firm operates, expressed as the set of governmental or other civic body policies, rules and preferences may develop in directions that are adverse to the firm's business operations. In extreme manifestations political risk may include revolution, war or other significant change in the policy stance of the sovereign entity
 
'''Political Risk''' is the possibility that the political environment in which a firm operates, expressed as the set of governmental or other civic body policies, rules and preferences may develop in directions that are adverse to the firm's business operations. In extreme manifestations political risk may include revolution, war or other significant change in the policy stance of the sovereign entity
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Political risk is identified and measured through [[Political Risk Analysis]]
  
 
=== Nature of Political Risk ===
 
=== Nature of Political Risk ===
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** Earthquakes
 
** Earthquakes
 
** Other natural disasters
 
** Other natural disasters
 
 
== Political Risk Analysis ==
 
The analysis of political risk is largely a qualitative analysis, potentially leading to an [[Expert Based Models | expert based model / scorecard]], for example a [[Qualitative Rating Score]]. The analysis may involves some or all of the following elements:
 
 
* Review of Governmental organization (representativeness, legitimacy, popular support)
 
* Economic strengths / weaknesses of the country and its main productive / business sectors
 
* Historical analysis of the political trajectory of the country (and similar countries)
 
* [[Geopolitical Risk]] analysis (relations with other countries)
 
* [[Scenario Analysis]] of possible future developments.
 
 
  
 
== Impact ==
 
== Impact ==

Revision as of 15:48, 30 November 2019

Definition

Political Risk is the possibility that the political environment in which a firm operates, expressed as the set of governmental or other civic body policies, rules and preferences may develop in directions that are adverse to the firm's business operations. In extreme manifestations political risk may include revolution, war or other significant change in the policy stance of the sovereign entity

Political risk is identified and measured through Political Risk Analysis

Nature of Political Risk

Political Risk can be decomposed into an internal and external component, the former being a reflection of the country's political structure, the latter being linked to its relations with other countries (also denoted Geopolitical Risk). Obviously in the modern global economy there is significant dependency between the internal and external domain and geography is by far no the sole determinant of political and economic relations between countries.

Political risk can be linked to changing societal and/or governmental attitudes toward business practices, for example their environmental, ethical or social profile and impact (see Sustainable Finance), which in turn may lead to legislation or other measures that may invalidate existing business plans and operations.

Political risk includes Regulatory Risk, that is, the risk that applicable regulatory frameworks may be amended in directions that negatively affect business plans and franchises.

While overlapping with, political risk has elements that are quite distinct from Sovereign Risk and Country Risk. These risk types are conventionally linked with scenarios in which a Sovereign State is in financial and economic difficulties. Hence while an unwillingness to repay sovereign obligations is by definition a political decision at the sovereign level it is but a specific policy decision among a broader possible set.

A classification of political risk from the perspective of an internationally operating business has been given in[1]

  • Political Uncertainties:
    • War
    • Revolution
    • Coup d'tat
    • Democratic changes in government
    • Other political turmoil
  • Government Policy Uncertainties
    • Fiscal and monetary reforms
    • Price controls
    • Trade restrictions
    • Nationalization
    • Government regulation
    • Barriers to earnings repatriation
    • Inadequate provision of public services
  • Macroeconomic uncertainties
    • Inflation
    • Changes in relative prices
    • Foreign exchange rates
    • Interest rates
    • Terms of trade
  • Social uncertainties
    • Changing social concerns
    • Social unrest
    • Riots
    • Demonstrations
    • Small-scale terrorist movements
  • Natural Uncertainties
    • Variations in rainfall
    • Hurricanes
    • Earthquakes
    • Other natural disasters

Impact

Political Risk is experienced differently by entities within a sovereign region and those outside the region but with interests / activities there (in the context of

Mitigation

Political risk can be controlled / managed with risk management tools such as:


See Also


References

  1. A Framework for Integrated Risk Management in International Business. K.D. Miller, 1992

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