Getting Started with Country Risk Analysis 9: A Flexible Tool for Impact Assessment of (Geo)Political Risk Indicators (by Gaia Verhulst)

Our Guest Contributor: Gaia Verhulst

(Geo)Political Risk IndicatorsIn 2014, Gaia Verhulst obtained a MSc in Comparative and International Politics from the University of Leuven, Belgium. Inspired by her dissertation on traditional leaders and rural development in South Africa, she decided to pursue a Specialised Masters degree in International Cooperation and Development at Università Cattolica in Milan, Italy. Upon graduating with highest honours, she performed several internships in private and non-profit organisations in South Africa and Belgium. She currently works as the Fundraising and Communication Officer of a Belgian development NGO that seeks to enable rural development in the Democratic Republic of Congo. In the future, Gaia aspires to professionally combine her enjoyment of political analysis and her passion for socio-economic development in an international setting, while acquiring country or region-specific expertise.

The Summer School on Political Risk Analysis

In July 2017, I participated in the Summer School “Country Risk Analysis 1: Political Risk Indicators, Geo-Economics and Report Writing” at Maastricht University. With an academic background in international relations and international development, I applied for the Summer School to be introduced to (geo-)political risk analysis, a method that I deemed useful to make multidimensional analyses of (developing/emerging) countries and regions. Participating in the course was a good learning experience because the course was intellectually challenging and practice-based. Exchanging views with a diverse group of students and professionals from four different continents enabled me to open up my perspectives on geo-politics and showed me possible pathways to combine my analytical mind-set with my passion for international development topics. The experience has taught me about the complexity of simplification, whereby history, present, and future are interlinked and influenced by various factors.

Course leader Leonhardt van Efferink (GeoMeans) exemplified how assumptions are an integral part of political risk analysis and that the strength of the analyst’s arguments is based on well-informed research, sound analytic and economic reasoning, the inclusion of multi-dimensional factors, and the presentation of the analysis itself. The challenge is thus finding an appropriate balance between assumptions and facts, complexity and simplicity, and between uncertainty and probability. Finding this balance could at times be confusing.

During the lectures, Leonhardt further presented his political risk analysis framework as a model for the students to work with during classes and assignments. Based on this framework, I developed a table to present my findings of a political risk analysis of Iran. Impressed by this table, Leonhardt asked me to write this guest contribution. The example in this contribution concerns the possible effects of the election of a new US president on the political risk of Iran. It has been slightly changed as compared to the assignment, taking into account feedback from Leonhardt.

The Assignment during the Political Risk Analysis Summer School

One of the key assignments during the Summer School was to write and present a group assignment on the political risk analyses of a set of countries in a particular region. A key element of the assignment was to identify the (geo)political risk factors with a negative impact on the potential of a country to generate growth in the domestic economy, the export revenues, and/or the foreign direct investment inflows. More specific, the political risk analysis focused on the risk that a company located in a country without a hard national currency could not repay a USD-loan to a foreign bank in 2020. Each student was assigned one country and I analysed Iran. The analyses were used as input for a comparison of the countries in order to assess the levels of political risks in the region.

My Table for (Geo)Political Risk Indicators

While writing my report, I structured my thoughts by designing a table that singles out one (geo)political risk indicator by identifying its potential risks, influencing factors, and economic effects. I will present the use and reasoning of this table below, using the example of my assignment during the course.

The developed table is useful when writing a country risk report to structure the thoughts and ideas that arise during the process, and to assess the different (geo)political risk indicators. The table follows a simple, yet complete structure and is to be used as a flexible tool. It can be used to structure the analyst’ thoughts, to understand the different implications of one political risk indicator, and to present the analysis to its readers.

(Geo)Political Risk Indicator (Step 1)

Indicator type(s) (Step 2)
Value(s) (Step 3)
Risk scenarios (Step 4)
Impact assessment(Step 5) Domestic
Export/trade
FDI
Relation to other indicators (Step 6)
Definition of political risk (Step 7)

Seven Steps in Table for (Geo)Political Risk Indicators

Step 1: Identify a fitting label for the (geo)political risk indicator that is clear, concise and covers the load as much as possible.
Step 2: Elaborate on the chosen (geo)political risk indicator by indicating several of its key characteristics. A (geo)political risk indicator can be of several types of nature: external/internal, geo-political/geo-economic, diplomatic, structural, recent evolution, etc. This will enable you to identify possible influencing factors and it will show you whether your chosen indicator fits your definition of ‘political risk’ that you have chosen for your country report.
Step 3: Summarise in one or two bullet points how the (geo)political risk indicator is currently manifesting itself in the country of analysis. This will enable you to identify how the current situation in a country influences the likelihood of the particular (geo)political risk. In order to summarize the value of the indicator in that particular country, think of following questions: What is the current situation in the country with respect to the (geo)political risk indicator? Has there been a recent change that could have an influence? Why should this particular (geo)political risk indicator be included in the risk analysis?
Step 4: In order to relate the (geo)political risk indicator, the current situation in the country and the potential impact on the economic growth potential of a country, think about the possible manifestations of the risk. Following questions can guide you: Why is the current situation or evolution potentially risky for the economic growth potential? What are the different risks that could occur that have a potentially negative impact? Here you will find yourself already thinking about potential scenarios, but for now, it will help you define the (geo)political risks and why they would be considered a (geo)political risk.
Step 5: The aim is to think about a possible correlation or causation between the (geo)political risks you have identified and their (negative) impact of the economic growth potential of the country. You can specify the impact by identifying different levels, such as the impact on the domestic economy, the export and trade sectors and the Foreign Direct Investment (FDI) figures. It is up to you to decide how you will structure this and how detailed you will perform the economic analysis, but these three levels are a good starting point as they touch upon three key economic indicators that will determine the economic growth potential of a country.
Step 6: Examine how this (geo)political risk indicator relates to the other indicators you have listed in the analysis, as well as other influencing factors you have identified during the research process. This will help you determine the significance of the risk indicator, as well as the uncertainty of the risk occurring. The more influencing factors you find, the more uncertain – but complete – your risk analysis will be. This step will give you an incline about how complex it will be to determine the likelihood of the political risk(s) occurring.
Step 7: As a final step, cross-check your work by applying the determined definition of ‘political risk’ to the content of the table. This is a final check to assess whether you have accurately identified the political risk indicator. Following questions can help: Does your table touch upon every aspect of the definition? Does the content of your table follow the definition you have determined? For example: if you have identified “political” as pertaining to “power relations”, has your political risk indicator touched upon power relations as well?

Impact Assessment of New US Administration for Political Risk of Iran

A (simplified) version of the table developed during the course assignment is listed below as an example. This table identifies one external (geo)political risk indicator that could potentially negatively influence Iran’s economic growth potential, namely the fact that a new United States administration took office at the beginning of 2017.

EXAMPLE: (Geo)Political Risk Indicator for Iran – New US Administration

Indicator type(s) – external
– geopolitical
– diplomatic
– recent evolution
Value(s) – Improvements in relations during former US Administration
– Uncertainty about the new administration’s stance vis-à-vis Iran
Risk scenarios – Deterioration of diplomatic relations?
– Failure or renegotiation of Nuclear Deal?
– Imposition/renewal of (economic) sanctions/measures?
Impact assessment Domestic If sanctions: trade sectors shrink unemployment rises internal demand decreases economic growth potential goes down
Export/trade If sanctions: (oil) revenue decreases external demand decreases foreign-currency earnings potential goes down
FDI If sanctions: FDI perceived more risky attractiveness and confidence decreases external demand decreases foreign-currency earnings potential goes down
Relation to other indicators – Engagement with international community
– Oil dependency for export revenues
Definition of political risk “Actors (Iran, US) or events (diplomatic negotiations, sanctions) that influence the decision-making process (nuclear programme, economic integration) or power relations within a country, which will have a negative impact on the economic climate (economic growth potential) of that country.”

Conclusion

The table for (geo)political risk indicators can be used for at least three purposes. First, it can help the political risk analyst to structure the research process. Second, the table can be of help to understand the different implications of a socio-political risk indicator for other socio-political indicators, macro-economic indicators and various forms of country risk. Third, it can be a great tool to present an analysis to the target audience in a well-structured and accessible way.

However, this table can not simply be used for every political risk analysis. Depending on the objectives, time horizons, and target audiences of a country risk report, several elements may need to be deleted, changed, or added.

(Geo)Political Risk Indicators

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