From the CEO – April 2020

Dear Clients,
As it is often said, there is a time for everything.  Now, given that the peak of the COVID-19 infection curve in most countries has passed and all attention is devoted to various ways of ‘opening’ economies, this is the time to begin to think differently about a number of things.  In our case, it’s geopolitical risk.  How it might change over the next couple of years? And what might be the major changes business and investment will face?
First, on a positive note: Despite warnings of a ‘second wave’ of infections in the near future, recent developments affecting treatment are encouraging. Indeed, the pandemic has catalyzed the development of various vaccines both by pharmaceutical firms and research organizations. Chloroquine, despite media efforts to discredit it, was approved by the FDA for emergency use, and other anti-viral drugs, such as Favilavir and Remdesivir, are looking good in terms of their ability to treat the infection.
By most accounts, some treatment will be available during the latter part of the summer, which should do well to ease concerns about the overall impact of the disease, and restore confidence in our ability to resume ‘normal’ activities. The spillover effects on commercial and economic growth will be welcomed.
In terms of the effect on our industry, however, some changes are already clear – if not entrenched – and indeed began some time ago.  First, given that serious discussions of the effect of COVID-19 require a multidisciplinary approach, and given that the ‘talking heads’ made some rather significant and erroneous ‘calls’ over the years in relation to important political events, the significance of the ‘country expert’ will diminish even more, save, of course, light media entertainment.
In their place – and existing alongside them for many years – are approaches to geopolitical risk that are grounded in data and lengthy time-series, which allow for a more nuanced, comparative approach.  Most important are the data providers whose series are independently back-tested for accuracy and relevance.   As I’ve mentioned many times before, geopolitical risk can only become meaningful if it is quantified over time and between jurisdictions, and when it is applied to the behavior and protection of assets.
As such, this approach to risk will become all the more important as we face some serious challenges over the short- to medium terms.  Perhaps most important – since it really forms the basis for all discussions in this vein – is the process of globalization.  Already receding as a model of economic development, it will continue to face significant headwinds.  High levels of joblessness and debt repayment and servicing costs, among other items, will force governments and firms to focus inwardly and to work together. Increased regulation, tariffs, performance incentives, and heightened levels of social inequality will make cross-border deals more challenging and political risk all the more important.
Like many developed economies, while emerging markets will not become any less relevant as potential destinations for global capital, there will be winners and losers. Those with responsive political institutions (democratic), policies designed to reduce inequality and poverty and heighten transparency, and with reasonable debt and servicing costs will be seen as attractive.  Those that embrace global capital and do so in predictable way – offering investors and business a stable operating environment – will be favored, too.
Moreover, it’s not entirely clear whether China as an unquestioned recipient for capital will continue.  To be sure, there has been considerable negative press directed at the Chinese leadership over its lack of transparency during the early stages of the pandemic, which will likely remain as the fallout from the virus’ spread continues.  Concerns about supply chain arrangements will come into sharper focus. China’s commercial and investment efforts globally will come under greater scrutiny.  Already we are learning of problems affecting China’s Road and Belt Initiative as recipient countries – reeling under the stress of higher spending and depressing growth prospects – have sought different repayment terms to the loans provided for various (largely) infrastructure projects.
Finally, despite suggestions that some commodity prices will be at low levels for years to come (such as oil, although I have my doubts about its price trajectory), food price inflation will likely become an issue as 2020 wears on. So will as will social disorder or dissent over access to services and other means of equality.  ICRG has long quantified these risks under the categories of ‘Socioeconomic Conditions” and “Internal Conflict” and they will impact other aspects of a country’s geopolitical risk profile, from overall government stability to the investment climate.
Turning to our risk adjustments for the month, it bears mentioning that the April data represents a complete update to reflect the COVID-19 environment to date.  Almost every country in the ICRG universe had its political risk profile changed, and every country had its economic and financial data and risk numbers updated!   This was the first time in the 40-year history of ICRG where the numbers were so fundamentally altered.
March was again a very impressive month for new and returning clients. On the former, we would like to welcome MD Financial Management (Canada), Purdue, University of Brunei Darussalam, Cornell, KEDGE Business School (France), the US Treasury Department, and the University of Antwerp (Belgium).
We would also like to welcome back Harvard University, the University of Laval (Canada), Princeton, Johns Hopkins, International Idea, Citadel Asset Management, Johnson & Johnson, Columbia University, and SKEMA Business School (France).
In other news, we are currently engaged with Saudi Arabia and Uzbekistan on number of issues including benchmarking, index development, and inclusion in the ICRG coverage.  Officials from both countries have been stellar in their professionalism and insight and we look forward to the future as these economies further develop into the world-class entities they rightfully are.
By extension, PRS is in the exploratory stages of a wide-ranging partnership with the University of National and World Economy (Bulgaria) and the University of the Andes (ESE Business School) (Chile) for an executive learning program and think tank dealing with geopolitical risk in the post COVID-19 era.  Stay tuned.  Distance attendance will be encouraged!
PRS Private Client Advantage, which offers new and existing clients a greater diversity of data offerings and regular updates, consultations, bundled products, and more, is – judging from client demand – even more essential.  Contact us for details.  With the fluidity of the ratings, this benefit for clients is especially important.
On the academic front, we continue to be the only geopolitical risk firm that is used by the world’s top researchers, with findings that truly illuminate the field.
Recently, several finance specialists authored a recent IMF Working Paper that used our ICRG risk data to help draw the correlation between US housing prices and foreign political events.  Conflating international risk events with local asset prices is a welcomed addition to the literature and should spawn further efforts. (https://bit.ly/2KLZGma)
Additionally, using ICRG risk metrics, a number of European researchers recently explored the relationship between political risk and Mexican financial assets, noting the positive impact of risk on volatility, equity price movements, and foreign exchange markets. (https://bit.ly/2So9k2F)
I appreciate our longstanding relationship with the academic world, whose findings have truly advanced the literature on political risk and its application to a wide range of phenomena.  Thank for you for your years of support.

CHRISTOPHER MCKEE, PHD CHIEF EXECUTIVE

Christopher McKee is PRS’ CEO and Owner. An international political economist, global investor, entrepreneur, and author, Chris received his PhD from Queen’s University (Canada) and has been involved in the field of geopolitical risk, limited recourse financing, and private sector development for the past 25 years.