Supply Chain Council of European Union | Scceu.org
Supply Chain Risk

A Political Risk Tsunami In The Making?

Companies operating in the region will have to contend with an unprecedented wave of political risk triggered by the pandemic, including civil unrest, political uncertainty, and governments eager to re-write the rules of the game.

By Thomaz Favaro

While few countries in the world can claim to have been well prepared to tackle the health and economic consequences of the COVID-19 pandemic, a series of factors made Latin American nations particularly ill-placed for the challenge from the outset.

Those consequences will be felt across all segments of society and presage an unprecedented wave of political risk for businesses; forcing companies to give policy dynamics a central position in their crisis management and strategic planning.

Data from the UN Economic Commission for Latin America indicate that, prior to COVID-19, the region was already facing a period of lackluster economic growth (average of 0.4% between 2014 and 2019), rising debt levels (from 29.8% of GDP in 2011 to 43.2% in 2019) and persistent primary deficits (since 2011). This has also been felt in the streets, with many countries seeing unprecedented levels of social unrest—notably the wave of protests felt across the Andean region in 2019.

This economic malaise even prior to COVID-19 has meant that governments across much of the region have limited room to engage in major fiscal stimulus without jeopardizing their long-term fiscal prospects to some extent. For the most vulnerable economies, the crisis will likely push them over the edge; Argentina and Ecuador have already postponed debt payments in 2020, and the prospects for painful debt restructurings are rising by the day.

These factors strongly suggest that businesses operating in Latin America are likely to face a bumpy ride in the near future, as COVID-19 remains at an accelerating pace across virtually all countries in the region. Control Risks anticipates that profound economic impacts will be accompanied by an unprecedented wave of political risk emerging on the back of the pandemic.

The crisis is fueling deeply-rooted political grievances; the prospect of measures like delayed elections (such as in Bolivia) risks exacerbating those, generating political instability for businesses. It is also providing an opportunity for autocrats to strengthen their grip on power, notably in Venezuela, where the regime will likely delay the December Congressional elections, and in Nicaragua, where the Daniel Ortega administration will try to postpone a crucial electoral reform.  

The future of companies in hard-hit sectors—transport, tourism, entertainment and retail, to name a few—will be defined not only by their financial ability to weather the storm, but also by the extent and shape of government support during the pandemic. Firms in regulated sectors also face significant contract risks: infrastructure concession holders are operating under a cloud of uncertainty as they are forced to renegotiate terms amid plummeting demand.

In Colombia, the government has extended the length of infrastructure concession contracts to allow concessionaires to recover the sudden and abrupt loss in revenue. Similarly, many developers with large infrastructure projects now have operational challenges brought by COVID-19 and a credible risk of running behind schedule.

Additionally, companies across Latin America face a myriad of rising regulatory risks, with sector-specific rules re-written overnight by policymakers willing to support their constituencies in times of economic stress. Energy firms in Chile must contend with a freeze in electricity tariffs, while pharmaceutical companies in Brazil have been unable to raise drug prices. The Argentine government imposed new price freezes on food and medical supplies, while in Peru Congress has temporarily halted toll charges.

In most of those cases, it is yet unclear if and how governments plan to compensate affected firms for potential losses. Last but not least, when contracting with the public sector, corruption risks are exacerbated in times of emergency procurement—not to mention increased internal fraud risks.  

The outlook for social unrest seems equally challenging. On the one hand, protest outbreaks that seemed all but certain—such as in Chile in March—were put on hold as citizens adapted to the new social-distancing paradigm. On the other hand, the risk of riots and looting will remain a concern throughout the pandemic and its aftermath.

There have been reports of violent demonstrations by citizens demanding government support in Colombia, El Salvador and Honduras; in northern Mexico, concerns over employee safety triggered a wave of labor unrest in manufacturing hubs such as Ciudad Juárez and Tijuana. The real or perceived threat of supply shortages, as well as failure to distribute aid amid COVID-19 quarantine, will remain potential triggers for further unrest in the short term.

Furthermore, the grievances that led to the protest wave in 2019 remain in place—including, but not limited to, social inequality—and are bound to be further exacerbated by the COVID-19 crisis. Governments will be eager to return to austerity as soon as possible, but that will be a bitter pill to swallow for those impacted by the economic crisis. This suggests that protest activity is likely to resurface stronger than before as soon as citizens feel somewhat comfortable about resorting to public gatherings to make their voices heard.

These challenges will stress-test the resilience of many organizations operating in Latin America to cope with heightened risks. The rapid pace of change reinforces the need for risk management tools such as scenario-based planning and risk monitoring programs. The cacophony of government responses—often with conflicting messages between national and local governments—means that businesses will often be better off relying on their own contingency plans. Companies and investors will find that having robust programs to mitigate political, integrity, and security risks is not only a competitive advantage, but is essential to success.

Related posts

Rains quell fire risk around Cambodia’s Tonle Sap, but the future looks fiery

scceu

Dáil to be recalled early after schools reopen

scceu

FBI and CISA issue holiday ransomware, cyberattack warning

scceu