Political Risk Index: Autumn/Winter 2023

High government expenditures during the pandemic, coupled with high global inflation and interest rates in 2023, have contributed to an escalating debt crisis in emerging markets. According to the International Monetary Fund (IMF), 36 low-income countries are at high risk of debt distress or are already in distress, and thus struggling under an unsustainable debt burden. Countries including Ghana, Malawi, Sri Lanka, Zambia and Suriname have already defaulted. Some countries at risk, including Egypt and Jordan, are likely to be severely impacted by the ongoing crisis in Israel.

This edition of the WTW Political Risk Index looks at the politics of the emerging markets debt crisis, and features research from the geopolitical consultants Oxford Analytica and the credit insurance group Credendo, as well as WTW’s trade credit and political risk teams.

Overall, this research indicates that political challenges may make it more difficult for multilateral institutions, including the IMF and World Bank, to play their traditional crisis-management roles, which could heighten the political and economic risks associated with the crisis.

Political Risk Index: Key findings

Government spending cuts are likely to trigger protests, as seen in the dramatic unrest in Chile in 2019, Sri Lanka in 2022, and France in 2018 and 2023. There are already indications that austerity-related protests are rising in low-income countries and countries with weak fiscal positions, despite these protests becoming less frequent in Europe and North America.

In 2024, countries at risk will include Jordan (which is also likely to be adversely affected by the crisis in Israel), Kenya and Brazil. The risks to political stability associated with spending cuts may lead governments of debt-distressed countries to shun multilateral bailouts, including from the IMF, and favor bailouts from non-traditional lenders, such as China. In 2024 there will also be a heightened risk of ‘contagious protests’ spreading to multiple countries, as was the case during the Arab Spring.

Countries with a high ratio of public interest payments to public revenue may be most vulnerable to sovereign debt crises in the near to medium term. By these measures, Laos and Pakistan will be at particular risk in 2024. In the longer term, climate change is likely to become an increasingly important driver of crises of debt sustainability, necessitating reform of the international debt and financial architecture.

Over the past decade there has been a drastic shift in the composition of public debt. Commercial private creditors, non-traditional lenders (such as China, India, and Saudi Arabia), and a broader range of instruments have come to play a larger role. As a result, the politics of sovereign debt restructuring following debt crises have become increasingly complicated.

In an environment of heightened geopolitical tensions, efforts to improve coordination among these diverse creditors have become more difficult, and resistant to efforts at institutional reform. Hence future sovereign debt restructuring processes are likely to be lengthy and, in many cases, be dealt with bilaterally (especially where China is the lender). Under these circumstances, it appears likely that more countries will turn to opaque and non-traditional bailout options.

Access the Political Risk Index: Autumn/Winter 2023