From the CEO – April 2022

‘Nothing prints more lively in our minds than something we wish to forget.’

 — Michel de Montaigne

I’ve spent the last several weeks looking over our ratings and some of the trends that are becoming clear as we approach the middle point of 2022.  For a year that began with hopes of a strong economic rebound following the pandemic, with cries of a new “roaring twenties” being sounded largely through the business and investment worlds, the current period seems quite like the one I experienced growing up in the 1970s. Then, the Arab oil embargo did little to help growth prospects, and inflation reached double digit rates.  The combination of slow growth and higher prices was coined “stagflation.” Landing a new job was a significant event; we were encouraged to save gasoline by driving slower and less often. President Ford, among other leaders, told us to plant vegetable gardens and said he would ask the Treasury Department about the prudence of issuing “WIN” bonds (which stood for the slogan “Whip Inflation Now”) as part of a larger effort to encourage savings. During the early months of the pandemic, I spoke to clients and others about the return of inflation, largely connected to supply chain constraints, but also given the early – and connected – upward trajectory in various asset classes such as agriculture, which was susceptible to mobility restrictions and higher transportation costs and delays. Should the pandemic last longer than expected, I suggested that its effect on growth could lead to stagflation, although fiscal transfers and our ability to work around the pandemic did much to stave off that prospect. Unfortunately, stagflation now looks increasingly likely, pushed hard by the effects of Russia’s invasion of Ukraine. Both countries produce much of the world’s supply of gas, wheat, and oil, which has elevated prices in Europe and elsewhere.  Putin’s actions to turn off gas exports to Poland and Bulgaria (citing the two countries’ refusal to pay for shipments in roubles) have led to suggestions that the Russian leader has ‘weaponized’ natural gas exports, and thus increased economic uncertainty going forward.  Economic growth forecasts throughout much of the world have and continue to be revised downward, with the IMF lowering its global growth rate by a full percentage point in April over its January numbers. The problem – as well all know – is that stagflation puts central banks in a tight spot: Raising interest rates may help reduce inflation, but higher borrowing costs depress growth. Maintaining a loose monetary stance, meanwhile, risks pushing prices higher. And while some forecasters expect inflation to slow in 2023, citing such bromides as the world being less reliant on fossil fuels and (laughably) households being equipped to withstand higher prices given the savings accumulated during the pandemic, the real threat is that inflationary expectations have become embedded in the provisions of many goods and services. Such beliefs are difficult to reverse in the short-term and, unfortunately, relieved usually through recessions, as competition for scarce business opportunities intensifies. This was the case in the early 1980s. As it relates to geopolitical risks, the effects of the war on inflation and slower growth make for a potent cocktail.  Several notables from our April ratings are instructive:

• Algeria: Pressure from the international community to improve its rights record has diminished significantly since Russia invaded Ukraine in late February, touching off a regional diplomatic crisis that has made it imperative for European countries that depend on Russia for their energy supply to pursue alternative sources.
• Zambia: BlackRock – one of the country’s biggest private creditors – has come in for huge criticism for not agreeing to reschedule debt payments or accept a lower interest rate on the $220 million it is owed. Some have stated that this is delaying a much-needed restructuring that is important to enabling Zambia to move forward and helping those most in need given the huge sacrifices already made in terms of healthcare and social spending cuts. Any further defaults would be a serious setback for Zambia’s international image at a crucial time when the government is attempting to draw a line under the crisis. It should be further noted that none of Zambia’s debts has yet been canceled under the G20 Debt Relief Scheme launched in 2021.
• Belgium: Almost half of the respondents in a recent survey were “very anxious” about their personal finances, with higher proportions polled among those already in debt, women, manual workers, and the unemployed. Trades union coordinated strikes by schoolteachers in April, to be repeated in May, albeit ostensibly over working conditions, but clearly with the cost of living a factor, are likely to be just the tip of the iceberg if wage settlements are not high enough. They risk disrupting normal working life, while posing a political challenge to the authorities that will not wish to see the poorest worse off, and yet equally will wish to avoid a damaging wage-price spiral from developing.  Such conditions often raise support for militant groups, and so it has proved in terms of the popularity of the far-right and far-left.

For firms and investors, a long, quant-driven data series can help navigate these risks the above events illustrate, since they can provide predictive elements and resultant trading or risk mitigation stratagems that cursory opinions-of-the-day cannot.  For academics, the way inflation and lackluster growth can be made manifest in higher levels of social turmoil, less stable governments and policymaking, and the like, present untold research opportunities, grounded in empirical observations, further advancing the literature.

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Turning to our ratings for the month, some notables are worth mentioning.  In the Americas, Argentina is under some pressure as protests over taxes mount, and as weak external liquidity and macroeconomic imbalances will undermine the country’s debt repayment capacity. By contrast, Guyana’s economy looks set to expand by over 50% this year, as oil and non-oil sectors continue to grow. The country also looks to benefit from Russian gas bans. In Europe, record high prices in April and prospects of stagflation present headwinds for President Macron’s political allies as France enters the June legislative vote. Political risk is up in Sweden as reports indicate that Russian jet fighters have violated Swedish (and Danish) airspace. The government has boosted its military budget as troops prepare for a possible attack on Gotland Island. Moldova has submitted a formal application to join the EU, while the threat of Russian aggression increases with explosions rattling the Transnistria region.  In Romania, Ukraine grain shipments are being channeled through the port of Constanta, while the country’s forex cover is down to about 2-3 months and inflation rose to above 10% (yoy) in March. In Africa, insurgents target mining projects in Burkina Faso, forcing force majeure closings, while attacks on military bases in the north continue. Over in Tanzania, higher costs of imported oil are boosting inflation worries, with the risk to consumer and business confidence (and social turmoil) rising. Prime Minister Yaakob’s ruling coalition scored a win in the Johor poll, setting the stage for a general election in Malaysia. Inflation has cooled slightly on the back of some government-imposed price ceilings. Pakistan’s parliament ousted former prime minister Imran Khan, although the new head of government, Shehbaz Sharif, faces hurdles and a rocky term in office, complicated by a souring economy, relations with the military, and challenges from Khan. Finally, in the Middle East, Iran’s inflation was just below 40% (yoy) in April – the first time in a year, according to the country’s statistics agency – while public employees went on strike for wage and pension increases. In Libya, the opposition is gathering for an election to be held, with suggestions of an interim regime gathering steam.  Oil production is down (shut in some cases) as a wave of protests over government leadership continues.

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I enjoyed a very informative and pleasant meeting with the deputy governor and staff of the Philippines’ central bank recently in DC. The meeting was part of that group’s continuing dialogue with PRS on the various reforms the country has made on the socio-economic front.  A similar tête-à-tête was convened the same day with representatives of the DRC’s Legal, Economic, and Business Climate Reforms Unit of the Minister of Finance.  It’s great to see these countries pursuing a reform agenda that will be beneficial to many. We continue to receive considerable demand for our recently-released new addition to our popular Researchers’ Dataset series – one that offers clients a more granular look at the political risk components of the ICRG, supported by 20 years of monthly data.  The new series works as an excellent complement to the other data bundles announced this year affecting ESG, corruption, and internal/external conflict.  Scores of academic studies have been conducted using these series, providing unique insights into asset volatility, government responses to the pandemic, and many more.  Contact us for more information. Our book Quid Periculum? Measuring & Managing Political Risk in the Age of Uncertainty, co-edited and co-authored by Peter Marber (Harvard/Aperture Investors) is available, and includes such diverse topics as risk forecasting techniques, reliability measures, the impact of political risk on asset prices and sovereign debt workouts. Also featured is a special roundtable discussion by some of the world’s leading voices in the field on the future of political risk, who combine to address some of the challenges presented by globalization and COVID-19. April was another fruitful month for new and returning clients, ranging from some of the world’s top universities to the largest institutional investors throughout the US, Europe, the UK, and the Middle East and Asia.   Our data are now regularly featured in the research of the IMF, Bank for International Settlements, and various central banks, such as the Bank of Italy. The new look of PRS is coming in May.  Paying homage to our roots in the Hindu Arabic number system of the Renaissance period to more recently in the behavioral revolution of the late 1960s, one of our new features will be a regular podcast series, featuring interviews and discussions with some of the most distinguished practitioners and academics in the field of geopolitical risk, from such places as Saudi Arabia, Uzbekistan, the UK, and Dubai.  No other podcast series will offer such depth, relevance, and intellectual sophistication.  Stay tuned. Not only is ICRG being used by some of the world’s largest technology firms, but the data are now being incorporated increasingly into the artificial intelligence/machine learning sector, with an emphasis on ESG data! Our ICRG political risk scoring changes were very robust in April, affecting over 100 countries (of 141) and over 120 individual political risk metrics!! The ICRG data series continues to be the gold standard of all geopolitical risk data among the scholarly and research communities.  For example, in a recent study by academics at Nankai University in Tianjin, the empirical relationship between debt and national output was measured as it was conditioned by the quality of state governance.  Using a series of datasets – including ICRG – the analysis considered 106 countries over the 1996-2015 period and found significant results for the positive effect governance has for the debt-growth relationship.  (https://lnkd.in/giCkrCgp) Corruption has a highly determinative effect on inflation. Using ICRG data from 2011 and covering 72 countries, a recent study found a clear link between debt financing and graft, suggesting that corrupt officials have alternative sources of funds by which they contribute to high inflation. Central bank independence may not therefore guarantee the elimination of the effects of corruption on inflation. (https://lnkd.in/gMiv7xBK) Thanks for your continued support, and please contact us if we can be of any assistance.

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.