From the CEO – June 2020

Dear Clients,
The post C19 world (for most of us, at least) is redefining ways in which geopolitical risk can be conceptualized. Risk of this sort is not – and has never been – a uniform phenomenon, where the hazards to business and assets are more or less evenly distributed among, for example, various emerging markets in Africa or the Middle East. Nor is geopolitical risk necessarily confined by borders and as cyber-risk has become increasingly worrisome to countries’ security and firms’ economic health.  Even the distinction between developed and emerging and frontier markets is now almost inconsequential to thoughtful analyses of political risk as some risks tend to follow a pattern over time and are coincident to other risks.  Indeed, as our monthly ratings make clear, there are many emerging market countries that are significantly less risky than a number of developed nations.
Given these thoughts, one way therefore to look at geopolitical risk is from the perspective of a ‘movement,’ which can be defined as a self-contained part of a larger entity.
A classic Breguet watch, for example, comprises a number of inner mechanisms (calibers) that operate at different speeds, from the mainspring to the escapement, encased by a case.
A similarity exists in musical composition. Hector Berlioz’s, Symphonie Fantastique Op.14, a story of unrequited love (and execution), contains five movements, each with a title that illustrates the focus of the section.  Vivaldi’s Four Seasons does the same with each season containing three movements, with a slow movement between two quicker ones (and these movements likewise vary in tempo amid the seasons as a whole).
Looking at geopolitical risk from this perspective – viz., using the analogy of a movement – provides a more nuanced understanding of the field, one that goes beyond tired definitions and restrictive ways of thinking.  Political risk is an organic field of study and practice.  Freedom of thought is key. Next month I’ll extend this analysis a little and about how different risk metrics work together both theoretically and empirically.  Stay tuned.
Turning to the ICRG ratings for the month, a number of countries and events are notable.
In the Americas, Jamaica’s foreign exchange reserves popped nicely in May on the back of $520mn from the IMF. The tourism sector is cautiously reopening.  Meanwhile, life is less sanguine in Mexico as anti-AMLO protests have gathered steam in various states. Moreover, the country has produced over 200,000 cases of C19; consumer confidence is in the tank; and the peso has weakened by about 20% against the greenback over the past year.
In Western Europe, Chancellor Angela Merkel and her CDU received a solid boost in the polls from that country’s handling of the pandemic, although simmering trade and foreign policy disputes with the US might adjust Germany’s risk profile going forward.
In Eastern Europe, Belarus is facing continued protests ahead of the August vote, with reports now that some elements of the country’s security forces showing solidarity with the dissenters and President Lukashenko warning of a foreign plot to unseat him.
In Africa, the IMF is broadly supportive of Gabon’s economic outlook, as the country vacated the now infamous ‘distressed debt club’ with spreads against US treasuries narrowing considerably.  However, Kenya remains in the club – no thanks to the impact of C19 on the economy – despite having an IMF credit facility in place.
Over in Asia, Mongolia’s fiscal pressures have eased on the back of a range of multilateral loans.  Cases of C19 are insignificant. A new parliament has been sworn-in, adding a considerable measure of political stability for the near-term.
Consumer confidence in Australia rebounded nicely in June as the country prepared for its re-opening.  The PM’s approval rating is in good shape, although relations with China have deteriorated of late.
Finally, in the Middle East, Sudan’s economy is in a free-fall, with food shortages being reported and suggestions that military intervention might be in the offing.  Similarly, Lebanon’s crime levels have risen of late and food shortages were reported as the economy suffers on a number of fronts.  Talks with the IMF have begun and there is now talk of whether the currency peg ought to be maintained.
June was a stellar month for clients in our academic universe, both for new and returning clients. On the former, we’d like to welcome City University of Hong Kong, Guangxi University, Jyvaskyla University, ZZ Vergomoengsberatung, University of Alassane, Kent State University, Boise State University, and Florida International University, to name a few.
On the latter, we’d like to welcome back to the PRS family QS Investors, Shoko Chukin Bank, Wilfrid Laurier University, National Defense University, Yale University, Vontobel Asset Management, Ecobank (Togo), and Wellesley College. Thank you very much for your continued support for the best quant-driven geopolitical risk rating and forecasting data found anywhere!!
Our engagement with Uzbekistan continues and we are looking forward to welcoming the country to the ICRG index very soon. Our ICRG index has been broadened on several occasions in the past for bespoke clients, and we maintain this exclusive index for those interested.  Call or write to us and ask for information on ICRG-Plus.
PRS continues to move along its partnerships with various universities for a series of conferences and executive training programs in Bulgaria and Chile and into the Middle East.  Lots happening here, including a heightened presence for PRS in Turkey, so stay tuned for some major announcements over the next month.
Our partnership with Toggle (www.toggle.ai) continues to blossom and the work this firm has done over the past year is remarkable.  With Toggle’s availability now on every major trading platform in the US and elsewhere, investors can now access PRS’ data – and the AI-generated tradable actions it produces – globally.  Truly, the new face of quant-based geopolitical risk is here and PRS stands alone on the stage!
PRS’ ICRG data series continues to be the gold standard among the world’s leading academics and multilateral organizations.
In a landmark study as part of the IMF’s Working Paper series, researchers used our ICRG data extensively to determine the geopolitical risk metrics that were most important in IMF program implementation.  Given the activity of the Fund during the C19 crisis, the findings are especially relevant today.  Significantly, the study found that reduced ethnic tensions and improved government stability before programs were approved were key in their successful implementation.  Greater military involvement in a country led to lower disbursements, as did higher or sustained rates of corruption.  For more insights, see the following link: (https://bit.ly/AcHp62)
Finally, ICRG data were used to provide insights into the relationship between financial markets, interest rate spreads, and various political institutions.  ICRG data also showed that borrowing costs tend to be higher in election years than in off-election years. (https://bit.ly/IMFWP2)
 

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.