How Our ICRG Geopolitical Risk Ratings Explain Instability in Syria, South Korea, and Canada?

The world of geopolitical risk has heated up over the past month, as select countries from almost all regions have experienced some major risk realizations. All the countries in question had risk profiles that supported the various disruptions and so those that follow our ICRG risk ratings would not be entirely surprised by the events that have occurred.

On this score, long time clients will know that our data and forecasts are back tested for accuracy and relevance continuously, with the former being the subject of a seminal study by Campbell Harvey and others a few years back, titled “Political Risk Spreads, and published in the Journal of International Business Studies.

The authors constructed a series of models to test the predictability of the ICRG ratings, including OPIC claims and a unique textual-based database of risk realizations.  Using the ICRG data they were also able to construct political risk spreads for countries that do not have sovereign bond data, and to draw a measurable link between the spreads and inflows of FDI.

Significantly, the ICRG ratings were found to be predictive of risk realizations, and because it separates political risk from economic and financial risk, the series does not make the mistake of double counting systematic risk in the evaluation of international investments, as some conventional measures do.

**

Looking at Syria, the fall of Assad’s regime took almost everyone by surprise, as the several Islamic rebel groups captured city after city on their way to Damascus.  As we all know, Assad and his family fled to Moscow, and shades of power rest uncomfortably in the hands of rebel groups with roots in jihadist Sunni Islam, and some being backed by Turkey. 

The future direction of Syria is not clear at this point, although the rebels have said that Syria will not be used as a launchpad for attacks against Israel and that the 1974 agreement that established a demilitarized zone in Syrian territory will be respected.

Our ICRG political risk ratings on Syria have been in the ‘very high risk’ category since 2011 when the civil war began to heat up.  Minor adjustments were made during the ensuing years to reflect new sanctions against Assad’s regime, and as new territory was recaptured or ceded to warring factions. The final downward adjustment (more risk) came in September 2024, as Syria began to be drawn increasingly into the war between Israel and Hamas, and the violence further chipped away at Assad’s support.

South Korea represents a slightly more interesting case.  An otherwise rather healthy political risk score began to deteriorate slightly in May 2024 when the prime minister and his entire cabinet offered to resign after the recent election loss. Legislative stability was undermined as the liberal opposition forces would prolong their control of parliament until President Yoon completed his single five-year term in 2027. One outcome of the election loss mentioned by our analysts was that Yoon’s grip on the ruling party would be weakened and his overall popular support levels would ease.

The message would prove prophetic: moderate protests occurred; the ruling People Power Party picked a former justice minister as its new leader – an individual at odds with Yoon over policy; inflation began to tick up again; consumer confidence flattened; and police raided Yoon’s office and arrested the chief of police. Yoon came under investigation for insurrection and was banned from leaving the country.

Yoon’s efforts to enact martial law to quash the forces opposed to him is well known, and the president’s fate is not clear.  Yoon has been impeached and recently failed to appear before the country’s corruption watchdog after he was summoned for questioning over his attempt to impose martial law.  Yoon has been stripped of his duties by parliament.

Finally, Canada presents an interesting case as political instability is rare.  Prime Minister Trudeau’s approval rating has been on a consistent downward trend since June 2023, and his hold on the reins of power has been supported largely by an agreement with the third-party opposition, the New Democratic Party. The Conservative opposition has collected most of the lost support and Canada must have a general election by October 2025.

This eventuality might come sooner than expected. Chrystia Freeland, the former finance minister, resigned from Cabinet just shortly before unveiling Canada’s economic update statement, which revealed a $60bn CAD deficit ($42bn USD), far surpassing Freeland’s $40bn CAD target.

In her publicly-shared resignation letter, Freeland said Canada needs to keep its “fiscal powder dry” to deal with the threat of sweeping tariffs from President-elect Donald Trump, adding that it meant “eschewing costly political gimmicks” that Canada cannot afford – a clear shot at Trudeau’s proposed efforts to shore up popular support via $250 cheques to some Canadians and tax breaks on some essential items.

Calls for Trudeau to resign have gathered pace, with even some of the prime minister’s loyalists suggesting he decide on his future sooner as opposed to later.  A confidence vote cannot be held until late January and even then the vote could be delayed by proroguing parliament – a measure that has been used by Canadian governments in the past during times of political crisis, with the most recent example being in August 2020, when Trudeau’s government faced an ethics scandal over its handling of a contract with a charity.

**

Our return to Montreal in November is set, designed to meet with our new digital marketing and AI development teams.  Also, a partnership with a French firm will marry an ‘AI-complement’ to our forthcoming marketing efforts and data backend improvements of the PRS site.  Finally, our creative team in NYC is set to go with some new ideas to bring a fresher look to PRS, highlighting not only our unique, proprietary analyses, but the position PRS-ICRG occupies in the alternative/geopolitical risk data world. All exciting developments as 2024 ends!

Our new video series is currently in production.  Named ‘Au Courant’ after a previous publication of PRS’ that enjoyed considerable success, the new bi-weekly series will include synopses of timely geopolitical risk events and what they mean for investors and business; trends in the ICRG data and country forecasts; recent academic findings using the PRS data; and the occasional interview with academics and practitioners in the field.  The series should be ready by December 2024.

PRS’ work in developing several AI platforms for the use of our data are gaining pace with significant assistance from private equity groups and related lenders, as well as various end-users, especially in the academic world.  Stay tuned for more information on our work in this area.  That we have surpassed the six million data point mark in relation to our curated geopolitical risk data series is telling!  No other risk firm can offer such depth; nor can they claim the mantle of being consistently used in leading academic scholarship and appearing in the top journals.

Clients should note that our popular Researchers’ Dataset (RDS) series – containing updates from 2023 – is now available.  The RDS series – derived from our ICRG data – continues to yield unique insights in a range of topics that explore the impact of political risk on asset prices, inflation and monetary policy, the economic costs of war, youth unemployment and political stability, and much more.  Contact us at custserv@prsgroup.com to acquire about acquisition of the RDS updates.

October was another terrific 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 have become increasingly popular with the larger consultancies, helping them and their clients in assessing geopolitical risk over time and across 141 countries, and in relation to issue-specific concerns, such as supply chain security.

Our ICRG political risk scoring changes were very good in October, affecting some 75 countries (of 141) and over 108 individual political risk metrics!!

**

As always, ICRG and related PRS data continue to be the gold standard of all geopolitical risk data among the scholarly and research communities. For example, in a very interesting IMF Working Paper that used our ICRG data, the authors considered the impact of removing fossil fuel subsidies on presidential popularity levels, using difference-indifference approaches and a stylized theoretical model. 

Analyzing macro level data for two subsidy removal events in Mexico and Bolivia in the early 2010s, they found evidence of a negative impact on presidential approval. 

The theoretical probabilistic voting model used predicts that the decline in popularity is driven by high income groups if subsidies are regressive, and that lack of trust in the government lowers popularity of the removal in all income groups.
(https://lnkd.in/eKW5XAPK)

Using our ICRG data, during election years, firms reduce investment expenditures by an average of 4.8% relative to nonelection years, controlling for growth opportunities and economic conditions. The magnitude of the investment cycles varies with different country and election characteristics. (https://lnkd.in/eTrqy8KA)

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.