Heightened political and economic instability in developing and emerging markets will increase risks for corporates doing business with local clients. This, in turn, will likely lead to a surge in demand for political risk insurance, trade credit insurance and related reinsurance capacity.

Country risk, which is specific to a certain country, measures three types of risk:

  1. Sovereign risk: the risk that a sovereign (i.e. the local government) fails to fulfil direct and indirect (i.e. guaranteed) external debt-service obligations;
  2. Transfer risk: the risk that a local currency is not convertible into foreign currency and/or that foreign currency cannot be transferred abroad;
  3. Political and economic risk: the risk that political and/or economic events adversely affect the creditworthiness of all debtors within a country.

Examples of country risk, which also affects foreign direct investment (FDI) in emerging markets:

  • The government of a foreign country decides that no foreign currency can be transferred;
  • The local government decides that no dividends or profits can be transferred;
  • The government seizes foreign assets.

If the economic and political outlook for a country worsens, the debt-servicing capacity of a country deteriorates, and the country will more likely default (i.e. the country risk will increase). This is either because the country's ability to fulfil its obligations decreases or because of the increase in relative costs of repayment.

This will have implications for foreign corporates doing business with local partners. For instance, the time it takes for a client company or buyer of goods and services to pay its invoices to the supplier may increase significantly. This would lead to an increase in credit risk due to the heightened probability of default, i.e. the non-payment of invoices by a foreign business partner due to a lack of payment capacity.

Axco’s latest report “When Stakes are High: Political Risk and Trade Credit Re/Insurance” explores the nature of political risk insurance, trade credit insurance and affiliated reinsurance as well as how the modern global environment is shaping the market. The comprehensive insights, statistics and analysis included in this report provide an overview of the market itself, including its constituent players and functions, and also forecasts possible reforms and developments.