Political Risk

stock-market-chartWith the (unexpected) outcomes and results of elections and referenda it becomes more and more evident that politics – and with that the shift of power and influence – is one of the drivers of public risk. The unpredictable working of politics – and in fact of society itself – with the democratic system is therefore in discussion, and even the system of democracy itself. What is political risk? According to Wikipedia our collective definition is:

Political risk is a type of risk faced by investors, corporations, and governments that political decisions, events, or conditions will significantly affect the profitability of a business actor or the expected value of a given economic action. Political risk can be understood and managed with reasoned foresight and investment.

The last sentence is interesting. The recent US presidential election showed us that foresight is very limited and investment highly insecure. Businesses and governments may face complications as a result of what are commonly referred to as political decisions—or “any political change that alters the expected outcome and value of a given economic action by changing the probability of achieving business objectives”.

Political risk faced by firms can be defined as “the risk of a strategic, financial, or personnel loss for a firm because of such nonmarket factors as macroeconomic and social policies (fiscal, monetary, trade, investment, industrial, income, labour, and developmental), or events related to political instability (terrorism, riots, coups, civil war, and insurrection).” Portfolio investors may face similar financial losses. Moreover, governments may face complications in their ability to execute diplomatic, military or other initiatives as a result of political risk.

That politics and business are also interconnected in an emotional way can be seen in the highly volatile indices of the stock markets. More and more the political risk can be read by following these patterns. Our emotions follow a path of high mountains and deep valleys, sometime in a period of hours or even minutes. Political risk is not to be underestimated. The problem from the perspective of establishing public values and mitigating public risks is, that it hardly can be managed.