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The geopolitics of COVID-19 part 1: Short term impact

Willis Research Network Digital Dialogue

April 30, 2020

Bringing insights from the world of science into practical risk and resilience discussions.
Risk & Analytics|Credit, Political Risk and Terrorism
Pandemic Risk and Response

Welcome to the Willis Research Network (WRN) Digital Dialogues series. The WRN aims to bring insights from the world of science into practical discussions around risk and resilience.

…we are delighted to introduce these Digital Dialogues, to continue the discussion with virtual expert panels… ”

Hélène Galy
Managing Director
Willis Research Network

Throughout the year, we hold several events covering a wide range of topics, but these gatherings often leave many of us wanting to know more, so we are delighted to introduce these Digital Dialogues, to continue the discussion in a more digital way, with key questions tackled by a virtual panel of experts, both in-house and in our worldwide network of partners.

We hope that you find this series interesting and keep coming back as we add to it, and we would also be delighted if you wanted to suggest topics or questions to feed this discussion.

Hélène Galy
Managing Director
Willis Research Network

Digital Dialogue No. 1

Lucy Stanbrough, Emerging Risks Hub, Willis Research Network

We started 2020 in a world where areas that were once regarded as predictable and stable became volatile, and changes in international policy were bringing new uncertainty to long running conflicts. As COVID-19 continues to spread around the world, the impacts are creating new dynamics.

As COVID-19 continues to spread around the world, the impacts are creating new dynamics. ”

Lucy Stanbrough
Emerging Risks Hub
Willis Research Network

This Digital Dialogue looks to focus on those ripples and considers the short- and long-term consequences on geopolitics.  Whatever the case, it is likely that post COVID-19 nations will retreat to a more protectionist stance, as both the concepts of State and Nationalism are reinforced, especially as a potential global recession begins to bite.

Multinational businesses with many operations centres, multiple markets and complex supply lines are going to need to be vigilant to finance, economic and trade risks that area going to emerge as a result, and the thoughts from Elisabeth, Simon and Sam provide some insight on futures to watch out for.

The Panel

Elisabeth Braw
Resident fellow at the American Enterprise Institute (AEI)

Elisabeth Braw is a resident fellow at the American Enterprise Institute (AEI), where she focuses on defense against emerging national security challenges, such as hybrid and grayzone threats. Concurrently, she is a columnist with Foreign Policy, where she writes on national security and the globalized economy, and a member of the National Preparedness Commission (UK).

Before joining AEI, Ms. Braw was a senior research fellow at the Royal United Services Institute for Defence and Security Studies in London, where she founded its modern deterrence project. She has also been an associate fellow at the European Leadership Network, a senior fellow at the Atlantic Council, and a senior consultant at Control Risks, a global risk consultancy.

Simon Coote
Head of Risk Analytics / Deputy Director of Advisory, Oxford Analytica

Simon is an emerging markets specialist with an interest in business environments and investment. He is responsible for Oxford Analytica’s global risk analytics platform as well as on delivering scenario planning and forward-looking country analysis for large public and private sector clients.

Simon previously worked for Citigroup across Latin America, where he focused on identifying external and operational challenges for the bank. He holds an MBA from the Kellogg School of Management as well as an MA in International Political Economy from the University of Warwick and a BA in International Studies from the University of Birmingham.

Director of Political Risk Analytics, Financial Solutions

Q1. Let's start with the near-term implications of COVID-19, over the next few months. It appears likely that there will be a significant global economic shock. What countries might be hit hardest by this shock and why?

Elisabeth Braw

We are seeing impacts across a diverse range of countries. From my perspective – and this isn’t based on any exclusive economic insights – but more around geopolitical insights on how countries are faring so far, I would point to Italy, Spain, developing countries, and the US, as those who are likely to be hit hardest.  

I would point to Italy, Spain, developing countries, and the US, as those who are likely to be hit hardest.”

Elisabeth Braw
Senior Research Fellow

In general, the outbreak looks like it will highlight long running differences between northern and southern Europe, and once again we will see that dividing line around corona bonds, with more prosperous northern EU member states taking one position and southern ones including Spain and Italy another one.

Italy has been hit very hard by the virus and were facing underlying issues around their economy. It is almost a double whammy for one of the weaker performers in the Eurozone for some time. It has exacerbated underlying weakness, and we should all feel very sorry for them. Spain has also been hit very strongly by the virus. 

At a global level, the countries that usually lose out – developing countries – are likely to be hit badly, where a lack of resources and finances to protect themselves against viruses spreading are likely to result in shocks.

The US is another country I worry about. The preparedness was not there, and they are now chasing problems around the response that could have been avoided with stronger governance.  

Simon Coote

It is a little difficult to pick out candidates to be hardest hit because there are so many to choose from, but forced to pick, I would point to Europe as our area of concern. Not only because it is the current epicentre, but also from a political and economic perspective, we see it as one of the most vulnerable regions in a relative sense.

One of the exercises we’ve just conducted as part of our update for VAPOR (Value at Political Risk), is around updating country risk ratings with COVID-19 in mind. This covers 160 countries, of which 21 were downgraded as a result of the exercise. Of these 21 countries, 15 were European, with southern European countries being hardest hit. Other regions like Africa are a concern as well for some of the reasons Elisabeth mentioned. 

Probably the best way to sum up why we think Europe is most vulnerable comes from some of the analysis that Sam has been doing, where he has broken down the consequences into three buckets:

  • Direct consequences: issues like demographics, where Europe is struggling as a result of having an ageing population
  • Indirect consequences: things like trade and interdependence. Europe depends on trade amongst Member States – its success is driven by that, and that pillar has currently been taken out from under it.
  • Economic consequences: there are issues around levels of debt and how to respond from a budget and fiscal perspective. There are also questions around whether responses should be driven by each individual country or from an EU level.
Sam Wilkin

Simon and Elisabeth mostly focussed on the developed world, so I’ll focus on the emerging world with a few insights around Europe.

It is important to keep in mind that in most cases the direct impacts of the crisis – aside from maybe in Iran and China – are only just beginning to come to the emerging world. In the final analysis over the coming year, the countries that are ultimately hit hardest may be very different from those being hit hardest right now. As COVID-19 cases continue to spread the impacts may be very different, because of those direct and indirect impacts that Simon mentioned.

Most of the impacts we’ve seen so far have been indirect: the flight of foreign capital; the collapse of tourism revenues and remittances; and fall in global commodity prices. At the end of March, Zambia and Ecuador became two of the first countries to notify investors they were having trouble paying debts. Just today, Argentina has arguably had an effective sovereign default. Countries that are reliant on commodity exports for instance will be ones to watch for further impacts. That will also likely be the case for countries in sub-Saharan Africa, Central Asia, South-South-East Asia.

To dive deeper into some of those European trends mentioned by Elisabeth and Simon, some of the analysis we’ve been doing right now suggested that eastern Europe could be quite hard hit because of their aging population, an issue that has characterised Italy, as Elisabeth mentioned. Eastern European countries also have much weaker healthcare systems, so the final impacts could be much larger than those we’re currently seeing in western Europe and the US, where we’re already seeing this happen.

So, bear in mind that the impacts we’re seeing now may be a poor indicator for the final impacts after the immediate phase of the crisis passes.

Q2: What will the political implications of the shock be, for countries that are hit hard? Will any countries become politically unstable as a result?

Simon Coote

The short answer is that we’re concerned about the whole world and the political implications for all countries. In figuring out where to focus our attention, we’re asking three questions as the crisis unfolds: Who is to blame, who takes credit, and who pays. And then breaking that down into two key areas of risk.

  • Country risk: especially issues around debt, and how investors, companies and governments are or could be impacted. 
  • Society risk: focussing on issues around race, class, nationality, and gender.

The extent to which each of these impacts and relate to each other will really be driven by the financial ability to deal with these issues, and general government effectiveness. With these factors in mind there is still a lot to choose from at this moment – we would point to three regions to keep an eye on.

  1. Central and Eastern Europe

    Sam already mentioned one of them – Central and Eastern Europe – which is a particular concern for us. Partly for the reasons Sam mentioned around the quality of healthcare and their capacity to deal with these sorts of issues; but also, from a political risk perspective. We have growing concerns about the misuse of emergency powers.

    Across Central and Eastern Europe, we are keeping an eye on what role the EU is looking to play.”

    Simon Coote
    Head of Risk Analytics
    Oxford Analytica

    It is understandable that emergency powers are required to deal with an extreme public health threat; however, it appears that some governments – including those in Hungary and Poland – are beginning to use this to centralise decision making power, limit opposition, and play up the anti-immigration and nationalist agendas. We have concerns around the potential for political violence in these countries, and elections have already been postponed for potentially six months. In Poland the election is due to take place, but the opposition is not campaigning to comply with social distancing measures.

    Across Central and Eastern Europe, we are keeping an eye on what role the EU is looking to play. A financial package that provides significant aid and assistance might offset some of our concerns as it would likely compel closer adherence to EU norms and regulations, but so far it has been left to national governments.

  2. Africa

    The other region we’re seeing the extension of emergency powers as a threat to human rights and democracy is in Africa. This is being exacerbated by an escalation of hunger and poverty, caused both by people not being able to work and because of supply issues, inflation in food prices. We see the threat of political violence trending upwards there as well.

    This is also being combined with the fact that a number of these countries have significant debt loads that sit in US dollars, which brings about sovereign debt and exchange risk issues in countries like Eritrea, Mozambique, Zambia, and Mauritania.

  3. Middle East

    Finally, the Middle East will be an interesting region to watch. It is being hit by a combination of the pandemic and low oil prices, and that is creating uncertainty in economic models and future development.

    The growth in the private sector has been a big focus, and tourism, financial services, and professional services have been hit extremely hard. This will bring more pressure on to governments to play a role in both creating new jobs and broader development projects. Countries of concern around debt sustainability for us include Oman and Bahrain.

Q3: How will the European Union fare?

Elisabeth Braw

That’s something I’m really concerned about. This didn’t need to become an EU crisis, yet it became a problem as a result of short-sighted thinking by almost every single member state.

Italy filed an appeal for emergency assistance with the EU Commission’s crisis hub, which is something that every EU member state can do. However, not a single country responded, which left the door open for China to respond. It is important to remember that Italy is the fourth largest contributor to the EU, and questions were raised at a national level about the cohesion and effectiveness of the EU when nobody answered their call in a time of crisis.

In the following weeks, Italy made a commercial arrangement with China, who also sent a few donations. Russia also responded by sending around 100 military medics. This left China declaring a public relations victory, and Russian military medics in Italy where nobody can be sure about the true purpose of their presence there, and EU member states now realising this may not be a good idea and that they should have responded. However, the damage – no matter how unnecessary – had already been done.

A few member states have since stepped forwards, including Germany, who are doing a lot to help along with the EU commission including taking patients. However, this leaves a national memory of China and Russia helping when their fellow member states didn’t – even thought the aid sent by them was neither significantly large or helpful – the Italian people will remember that they stepped forwards when their neighbours didn’t. That is something that EU member states should consider and think on. There is still time to act and repair relations.

Q4: Might companies experience political risk losses as a result of these shocks? What types of losses are most likely?

Sam Wilkin

With any kind of global economic downturn – like the global financial crisis – you see credit losses and defaults from people not paying their bills. What you’re seeing now is this happening to countries, and this moves risk into the political arena.

We’re seeing countries unable to pay and businesses that deal with public entities or governments directly, facing political risk losses as a result. In many cases these losses will be more than the value of a contract. In sectors such as utilities, construction and manufacturing, businesses will have made a lot of upfront investments to back up this kind of a sale. That investment will also be at risk.

In emerging markets, where you’ve had countries that are reliant on tourism, remittances, and foreign capital to generate the hard currency they need, we’re also likely to see these countries facing a hard time.”

Sam Wilkin
Director of Political Risk Analytics
Financial Solutions

In emerging markets, where you’ve had countries that are reliant on tourism, remittances, and foreign capital to generate the hard currency they need, we’re also likely to see these countries facing a hard time. There are likely to be exchange transfer losses as companies are not able to money out of countries overseas and repatriate it back home.

Simon mentioned some of the types of instability issues that could appear in developed economies. As I mentioned before it is going to be hard to say what the impacts will be in the emerging world, because what we have seen so far could be a poor predictor of what happens in the next phase of the crisis. His points around emergency powers are certainly a concern. Also, there are countries where significant segments of the leadership are being infected. We’ve seen this in Burkina Faso, Nigeria, Syria, Iran, and the UK. What does this do to stability?

Personally, I feel that during a major pandemic would be a bad time to join a riot – not that I’ve joined many riots so I may not be the best authority on this – but I think there is more concern about these kind of instability risks, and we’re only just starting to see the virus take hold on some countries so this will be an area to watch.

Remember that some countries have only just imposed their lockdowns, so aside from China, this is early days where the political ramifications are concerned.


Managing Director of Willis Research Network
Head of People Risks Research

Hélène joined Willis in 1998, specialising in natural hazard modelling and reinsurance optimisation. Since 2001, she has been leading multi-disciplinary teams, who research, design and develop analytical solutions and insights for risk identification, quantification and management. She currently leads the Willis Research Network, an award-winning public-private partnership, which harnesses over 60 science partners to form innovative long-term collaborations, improving our understanding of risks (natural hazards, technological risks, geopolitical drivers of risk) for the benefit of clients and society: using science to support resilience.
Hélène has extensive experience in spatial modelling, design of innovative solutions, and applying science to business challenges. Her current focus is on Climate advisory services (advising corporates on how leading-edge climate research can help them quantify their exposure to climate variability and climate change; exploring the links between climate change and national security) and on People Risks (how people can increase vulnerability or improve resilience: terrorism, societal resilience to systemic risks, including pandemics).
She holds a BSc in Economics & Political Science (Sciences Po), and an MSc in Environmental Economics (UCL).

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Head of Emerging Risks and Business Engagement, WTW Research Network Team

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