Political risk

From Wikipedia, the free encyclopedia

Political risk is a broad term to collectively describe the risks companies and investors face due to the exercise of political power.¹ These include potential losses from expropriation, nationalization and regulatory changes, as well as the potential risk of a government or government agency not honoring a contract. Political risks also include potential losses due to riots, civil-war and terrorism, as well as soft threats such as reputation damage and firm specific boycotts. Political risks are sometimes divided into country specific risks (which affect all companies operating within a particular country) and investment specific risks (such as discriminatory regulations). Political risks to portfolio investors tend to be country specific whereas political risks to foreign direct investors and individual companies tend to be investment specific.² It is the company’s chief financial officer or the risk manager who is responsible for assessing a company’s exposure to political risks, as well as to develop specific risk mitigation strategies. Companies frequently outsource the country analysis to political risk advisory firms, which specialize in assessing these types of risks. Companies may also develop relations with relevant authorities and community groups to mitigate investment specific risks. Political risk insurance, also called export credit insurance, is another way to mitigate political risks. Most governments as well as the World Bank provide export credit insurance to encourage investment in emerging markets.³