Verisk Maplecroft Political Risk Outlook 2021

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Verisk Maplecroft | Political Risk Outlook 2021
Political Risk Outlook 2021

The age of flux and flex
Matt Moshiri
If the last 12 months has taught us anything it’s that risk
President, Verisk Maplecroft needs to be hard baked into every decision we make.
It’s impossible to predict when high-impact events like a
pandemic will occur, but taking a forward-looking view
on threats to resilience and their implications should now
be top of mind for global business. In this year’s Political
Risk Outlook, we explore where, how and why some of
the key challenges might emerge in what has become an
unprecedented period of change.
2020’s legacy – debt, unrest and creeping volatility

Outside of health, it is economically that the impacts of the Covid crisis
have been felt most sharply. Reflecting on the biggest movers and
shakers of 2020 in our suite of risk indices provides key signals to some
of the market-shifting risks that may develop over the next year and
beyond. By far the greatest levels of volatility in the 160 risk issues we
measure were seen in 10 of our economic indices, including Economic
Growth and Fiscal Balance.
2 Verisk Analytics Official Public Information © Verisk Maplecroft 2020 | maplecroft.com

88
With growth stagnating and many government balance sheets in disarray,
the knock-on impacts of rising levels of debt and less flexibility on social
spending will have far-reaching consequences. Against this backdrop,
countries we forecast that political instability will rise in 88 countries. Of those,
will likely see elevated our projections point to 23 nations, including Brazil, the Philippines
political risks over the and several eastern European emerging markets, where unrest, flaring
next 2 years political divisions and erratic policy making have worrying potential to
severely impact the investment environment.
Governments falling back on resource nationalism

Mineral-rich countries are already attempting to regain some fiscal
firepower to offset these risks. Since the start of 2020, 18 countries
that rely on the hard commodities they produce saw a significant rise in
risk in our Resource Nationalism Index. The drivers of the increase are
varied. But one thing is for sure, we’ve seen this trend accelerate in our
data since 2017, and more governments are now willing to go down the
resource nationalism route.
We also expect the threat to expand even further over the next two years
as countries that are economically dependent on the minerals they export
try to claw back financial losses from the pandemic. The risks will be
highest in Africa and Latin America, and the mining industry will be lined
up to take the brunt of new measures.
Energy transition will catalyse political risk for least

competitive oil producers
It’s not just the mining industry that is in for a bumpy ride though. If Covid
has hollowed out any gains oil made over the last few years, the energy
transition will hammer all but the most competitive producing countries.
Those with the highest break-even prices and the least economic
diversification are the ones that will suffer most.
Our data pinpoints Iraq, Nigeria and Algeria as first in line to face a slow-
motion tsunami of political instability over the next 3-20 years, but African
fossil fuel producers including Angola, Equatorial Guinea and Gabon are
not far behind. Watch out for step changes in credit risk and policy or
regulatory volatility, as the worst placed exporters enter doom loops of
shrinking hydrocarbon revenues, political turmoil, and failed attempts to
jump start flat-lining non-oil sectors.

...geostrategic China’s pivot to authoritarian states for strategic resources

competition between shifts geopolitical sands
Washington and Beijing Natural resources are also high on the list for China as it tries to lock up
will be the single most its resource security and remove any vulnerabilities it has in its reliance
important factor shaping on countries it deems hostile. China is redrawing the geopolitical map
the global risk landscape... in the process and the implications are sweeping – not only for its
major strategic commodity trading partners, but also for the extractive
companies deeply invested in them. Our data shows China is pivoting
towards more autocratic regimes that represent greater stability for
its supply lines. But it is also using its massive market as a source of
diplomatic leverage. By securing diversified sources, China will be in a
better position to weaponise trade with geopolitical rivals.
US vs China – heavyweight match-up tops geopolitical billing

If anyone doubted Beijing’s intent to achieve its strategic aims they
should look at Hong Kong, where its grip has tightened. As we predicted
in our 2020 Human Rights Outlook, civil and political rights in the city
have suffered. Over the last year, Hong Kong saw the largest negative
shift in risk of any country or territory based on a combination of
our indices covering human security, democratic governance and
government stability.
With China’s emergence as a rival superpower, the geostrategic

competition between Washington and Beijing will be the single most
important factor shaping the global risk landscape for corporates and
investors.
To put this in context, we kick off the outlook by using our predictive
Interstate Tensions Model to identify the key geopolitical hotspots that
have the potential to spill over into a military confrontation in the year
ahead. That can mean threats, posturing, direct conflict or anything in
between. But the important thing to bear in mind is that the US vs China
is among the top global flashpoints where the chances of escalation are
greatest. The stakes are high and miscalculation or human error on either
side could be catastrophic.

Contents
Executive summary: the age of flux and flex 2
Our people 6
Political Risk Outlook: Impacts at a glance 7
Geopolitical risk: US-China among flashpoints with highest probability of

8
escalation
Resource nationalism surges in 2020, Covid-19 worsens outlook 13
2020’s sting in the tail: Political instability will rise in 88 countries 18
China’s resource security redrawing geopolitical map 26
Energy transition a political risk nightmare for least competitive

32
oil producers
Verisk Maplecroft: Country Risk Intelligence 37

Our people
The Political Risk Outlook 2021 contains expert research and analysis from senior members of our Country Risk
Intelligence team. Together they boast decades of experience, combining forensic knowledge of global issues
and country-level risks with a deep understanding of how these challenges impact multinational companies
and investors. Their analysis draws heavily on our industry-leading global risk analytics to provide a unique view
of the strategic risk landscape, enabling our clients to anticipate, understand and proactively manage the key
political risks affecting their operations, supply chains and investments.
Contributors
Hugo Brennan Dr Kaho Yu

Principal Analyst, Geopolitics Senior Asia Analyst
Jimena Blanco Franca Wolf

Head of Latin America Europe Analyst
Mariano Machado Arun Pillai-Essex

Senior Latin America Analyst Senior North America Analyst
James Lockhart-Smith Sam Haynes

VP, Market Risk Head of Risk Analytics
David Wille
David Irwin-Ransom
Principal Analyst
Data Visualisation
Market Risk

Verisk Maplecroft | Political Outlook 2021
Political Risk Outlook: Impacts at a glance

The matrix below summarises the potential impacts on Impact
investors and business relating to the themes covered in this Negative -4 -3 -2 -1
year’s outlook, based on location, timeframe and likelihood. Positive 4 3 2 1
N/A
Definitions Likelihood Value

Where: What geographies will the issue affect? Expected 75% to <100%
Timeframe: When will the issue materialise? Likely >50% to <75%
Likelihood: How likely is the issue to materialise in Unlikely 25% to <50% Impact
the timeframe? Remote >0% to <25% Investors Business
Energy and
Sovereign natural Supply
Theme Issue Where Timeframe Likelihood debt Equities Real assets resources chains
Geopolitical risk Geopolitical tensions between Global 0-6m Expected -2 -2 -1 -3 -3

Russia and the US increase
Relative easing of geopolitical Middle East 0-6m Likely 1 2 1 3 1

tensions in the Middle East
US and China engage in a Asia-Pacific 6m-2y Likely -3 -3 -2 -4 -4

military confrontation
Resource nationalism Blunt interventionism Sub-Saharan 0-6m Expected -2 -3 -4 -4 N/A

Africa, LATAM
Increasing regulatory burden Peru, Uganda, 6m-2y Likely -1 -2 -3 -3 N/A

Brazil
Direct/indirect impact of Chile, Canada 2y+ Likely -1 -2 -2 -2 N/A

normative changes
Political instability Threats to government Global, esp. 0-6m Likely -3 -4 -3 -3 -3

legitimacy overshadow high- and
moderating civil unrest outlook middle-income
countries
Left-tail destabilisation in Gulf, India, 6m-2y Remote -4 -3 -2 -4 -2

authoritarian states and some Azerbaijan
EM democracies
Hangover from pandemic Latin America, 2y+ Unlikely -4 -3 -2 -4 -3

borrowing binge in selected EMs Africa
leads to debt distress
China resource security Trade restrictions driven by Asia-Pacific 0-6m Likely N/A -3 -3 -4 -4
geopolitics
Closer ties between Russia and Global 6m-2y Likely N/A -2 -1 -3 -3

China
China accelerates diversifying Global 2y+ Expected N/A -2 -2 -4 -4

resource imports away from
hostile countries
Energy transition and Mounting instability in oil Global but esp. 2y+ Expected -4 -3 -3 -4 -2
political risk exporters with low capacity to West Africa and
diversify non-Gulf MENA
Growth opportunities in UAE, Qatar, Saudi 2y+ Likely 1 4 4 2 2

producers best-positioned to Arabia, Kuwait
diversify
Instability as economic UAE, Qatar, Saudi 2y+ Likely -2 -2 -1 -3 -1

diversification alters established Arabia, Kuwait
social contracts

Geopolitical risk: US-China

among flashpoints with highest
probability of escalation
Hugo Brennan
Principal Analyst, Geopolitics
Potential fallout from a confrontation between the US and China should

top corporate risk radars
8 Verisk Analytics Official Public Information © Verisk Maplecroft 2020 | maplecroft.com. Photo: Pool/Getty Images News via Getty Images
The geopolitical situation Joe Biden inherits at the dawn of his

Focus box presidency is significantly different to when he last held high office in
The Interstate Tensions Model is 2017. Great power competition between the US and China – the world’s
a statistical model that produces two geopolitical heavyweights – has accelerated and is now a defining
a probability between 0 and 100 characteristic of the international arena. How Biden squares up to the
that two countries will engage challenge posed by China will shape the geopolitical risk landscape for
in a military confrontation – corporates and investors over the coming year and beyond.
defined as ranging from threats Yet the 46th US president faces various obstacles at home and abroad
and posturing through to the to reasserting American influence on the global stage, and he may find
actual use of force – during the his ability to have a strong bearing on the trajectory of other geopolitical
next 12 months. It assesses flashpoints much diminished.
multiple variables within a
Against this backdrop, we’ve used our Interstate Tensions Model to
bilateral relationship, including
identify the key geopolitical rivalries that have the potential to spill over
the frequency of verbal conflict
into a military confrontation in the year ahead, and that should be on the
events, military spending, regime
radars of strategic decision-makers (see Figure 1).
type, foreign policy preferences,
and whether there is a history of
previous disputes.
Figure 1: Likelihood of geopolitical competition spilling over into a military confrontation in 2021
Country pair class definitions Legend

Country pair class Market impact
■ Geopolitical hotspot: Country pairs Geopolitical hotspot Cooling off High
most likely to engage in a military Temperatures rising Curve ball Medium
confrontation in 2021. Low
62%
■ Temperatures rising: Country pairs North-South Korea 60% 60%
that have experienced the greatest India-Pakistan 59%
58%
increase in the likelihood of a military
54%
confrontation occuring over the past
Saudi Arabia-Iran 50%
12 months.
■ Cooling off: Country pairs that have Greece-Turkey 45%

experienced the greatest decrease in 41%
the likelihood of a military confrontation US-China 39%
occuring over the past 12 months. 36%
■ Curve ball: Country pairs that you might

expect to face a high risk of facing a
military confrontation, but which our Azerbaijan-Armenia 25%
model suggests are statistically unlikely Saudi Arabia-Qatar 23%
India-China 21%
to do so.
11%
US-Russia 4% 3%
Australia-China 2%
2020-Q1 2020-Q2 2020-Q3 2020-Q4 2021-Q1
Source: Verisk Maplecroft ©

© Verisk
VeriskMaplecroft
Maplecroft2021
2021

58% Countering Chinese assertiveness will top new

administration’s foreign policy agenda
probability Biden’s top foreign policy priority will be managing escalating great power
competition with China. Our Interstate Tensions Model identifies the US-
US-China pairing faces China pairing as having one of the highest risks globally of tipping over
highest global risk of into some form of military confrontation, with a 58% probability of such a
military confrontation scenario occurring in the next 12 months – an increase of 19% over the
occuring in next 12 months last year (see Figure 1).
While neither side will want to resort to force to resolve their many
differences, there is an increasing likelihood that both sides will use
military threats and posturing to project power. Reports that Chinese
bombers conducted a simulated strike against a US Navy carrier group
in the South China Sea in January 2021 is one such example and
likely a sign of things to come. The danger is that such muscle flexing,
through a combination of miscommunication, misunderstanding and
miscalculation, will inadvertently result in the actual use of force in
theatres such as the South China Sea or the Taiwan Strait.
Biden faces pressure from both sides of the Congressional aisle to

maintain a tough policy towards Beijing, and his characterisation of China
as America’s “most serious competitor” during his first foreign policy
speech suggests hopes for a détente are wide of the mark. The rebound
in verbal conflicts chalked up between Beijing and Washington in January
2021 supports this assertion (see Figure 2).
Figure 2: US-China verbal tensions 2012-2020
Higher than baseline verbal conflicts Trump elected Trump launches Tit-for-tat consulate
US president trade war closures amid
Lower than baseline verbal conflicts accusations of
Chinese espionage
6
Obama Trump
(standard deviations)
5
Verbal conflicts
Trump descibes
4 Covid-19 as
the 'China virus'
3
-1
-2
Jan-12 Jan-13 Jan-14 Jan-15 Jan-16 Jan-17 Jan-18 Jan-19 Jan-20 Jan-21
Sources: Verisk Maplecroft, GDELT Project © Verisk Maplecroft

© Verisk 20212021
Maplecroft

our model flags the China stepping up pressure against US partners

Greece-Turkey pairing as Following military skirmishes along the disputed Himalayan border in
another likely geopolitical 2020-Q2 and Q3, our data also captures the rise in tensions between
flashpoint, with a 54% China and India – the latter is viewed by Washington as an important
chance of a military counterbalance to Beijing in the Indo-Pacific. A scuffle between Chinese
confrontation. and Indian forces broke out in a disputed border area in late January
2021 and we put the chance of further military confrontations over the
next 12 months at 41%.
The sharp deterioration in relations reflects a broader trend, where

Beijing has doubled down on a more aggressive foreign policy following
international criticism of how it managed the original outbreak of Covid.
Australia, a key US ally, is also on the frontline of Beijing’s ‘Wolf Warrior’
diplomacy and coercive foreign policy, although our model suggests there
is only a remote prospect for escalating diplomatic and trade tensions to
tip over into a military confrontation in 2021.
Biden takes reins as US influence on the wane

With the rules-based global order fraying in the wake of the Trump
administration’s disregard for international norms and its haphazard
foreign policy-making, ‘strongmen’ such as Erdogan and Putin have
profited from the resulting power vacuum. Biden will find reining in the
actions of these newly invigorated geopolitical power brokers a tricky
prospect. The storming of the US Capitol building by Trump supporters
on 6 January and the domestic divisions it exposed will likely only
embolden Washington’s international rivals further.
Within this context, our model flags the Greece-Turkey pairing as

another likely geopolitical flashpoint, with a 54% chance of a military
confrontation – such as a naval encounter over disputed hydrocarbon
resources in the Eastern Mediterranean – over the next 12 months. An
increasingly autocratic President Erdogan has adopted a much more
muscular foreign policy over recent years, which has seen Turkey deploy
military assets to multiple theatres in its near abroad. Striking a balance
between wooing and cajoling this strategic NATO member back into line
is another key foreign policy challenge on Biden’s plate.
An outlier within our Interstate Tensions Model is the US-Russia pairing.

Trump’s repeated reluctance to challenge President Putin’s provocative
foreign policies – from interfering in the 2016 US election to the 2020
SolarWinds cyber hack – is reflected in the very low probability of a
military clash. However, Biden has warned that the days of the US “rolling
over” for Russia are done, and we expect this tougher rhetoric to be
reflected in future iterations of the model.

US-China relations Separately, our model flagged escalating bilateral tensions that led to
is unsurprisingly the the outbreak of conflicts in the South Caucasus. While tensions between
geopolitical trend that is set Azerbaijan and Armenia will remain high in 2021, the presence of
to have the greatest impact Russian peacekeepers on the ground reduces the likelihood of a return
on global markets. to full-scale war. Two traditional flashpoints – the Korean Peninsula and
India-Pakistan – round out the geopolitical hotspots and shouldn’t be
overlooked.
Middle East as a silver lining?

One positive for President Biden is the decline in geopolitical tensions in
the Gulf, which has created the diplomatic space for Saudi Arabia and
its allies to end the three-year blockade against Qatar. While multiple
friction points remain, lifting the embargo adds salve to a sore that has
undermined unity among Washington’s Middle Eastern allies. One driver
is Riyadh’s realisation that it will have less leeway under the new US
administration, as underscored by Biden’s decision to pull US support
for the Saudi-led war in Yemen. Our model indicates that the prospect of
Saudi Arabia and Iran engaging in a military clash in the coming months
has also eased somewhat, although the regional rivalry will remain fierce.
Market impact
The trajectory of US-China relations is unsurprisingly the geopolitical
trend that is set to have the greatest impact on global markets. Bilateral
tensions between the world’s two largest economies have been on the
rise over the past decade, but a spillover into a military confrontation
would likely trigger an aggressive tit-for-tat policy response.
Under such a scenario, Washington would likely tighten export controls

and other sanctions against firms with links to China’s military, further
curb the ability of Chinese SOEs and domestic champions to access
American capital, and double down on efforts to reduce America’s
reliance on China as a source of critical minerals. Beijing’s retaliatory
playbook would probably feature import restrictions on US LNG, crude,
coal and agricultural goods, politicised regulatory probes against US
firms operating in China, cyber-attacks and potentially the arbitrary arrest
and detention of an American citizen or two. US partners and allies are
also likely to remain on the front line of any backlash from Beijing, as
Australian exporters of wine, barley, cotton and coal can attest.
More broadly, the corporate sector is increasingly viewed as a legitimate

target by sparring strategic rivals, and the unwary risk getting caught
in the crossfire of one of the world’s various geopolitical flashpoints.
Tracking the signals is therefore a crucial first step towards navigating a
year likely to be defined by geopolitical jostling.

Resource nationalism surges

in 2020, Covid-19 worsens
outlook
Jimena Blanco Mariano Machado
Head of Latin America Senior Latin America Analyst
Pace of interventionism rising sharply with miners in sub-Saharan Africa

and Latin America facing biggest increases in risk

34
In the last year, 34 countries have witnessed a significant increase in
risk on our Resource Nationalism Index (RNI). Reasons for the recent
surge vary but one thing is clear – the economic impact of Covid-19 has
countries aggravated an already growing tendency for government interventionism
have witnessed a in the natural resource sector. With 18 of these countries dependent
significant increase in on the minerals and hydrocarbons they export, we expect the threat to
risk in our Resource expand over the next two years as their governments try to claw back the
Nationalism Index financial losses of the pandemic. The mining industry will be lined up to
take the brunt of new measures.
Signs of another mining supercycle will only intensify the situation. As

Figure 1 shows, mining jurisdictions in Africa and Latin America, including
some of the top producers of copper and iron ore, dominate the list of
countries with the highest resource nationalism risks.
Figure 1: The 10 highest risk countries in our Resource Nationalism Index 2021-Q1
Venezuela DR Congo Russia Kazakhstan North Korea

Crude oil (75.5%) Copper (33.7%) Mineral fuels, oils and Crude oil (43.5%) Machinery (24.8%)
Maduro's reforms unlikely to Despite eagerness to contain waxes (50.1%) Seeking to address waning The new five-year plan
convince Western investors. resource nationalist rhetoric Rising oil prices have legitimacy and tamp down confirms the decision to
As the energy transition around mining, new PM improved the economic elite infighting,Tokayev increase self-sufficiency
accelerates, the oil sector Lukonde Kyenge's ability to outlook – and strengthened will increasingly turn and added centralised
may never recover its status influence policy will be limited its political resolve to nationalism control of the economy
Bolivia Zambia Zimbabwe Tanzania Papua New Guinea

Natural gas (30.0%) Copper (64.9%) Agricultural (52.4%) Stones and metals (38.5%) LNG (33.7%)
President Arce has staunchly The country made it into Mnangagwa's administration Fiscal indiscipline means Investors in the resources
defended resource sovereignty. the top riskiest countries seems to have departed businesses will face forceful sector will be watching closely
Chances of regaining much- in our index, following the from previous undertakings implementation of tax and to see whether PM Marape –
needed investor confidence attempted liquidation of pushing for reforms to regulatory reforms to bridge and his resource nationalist
remain unclear Konkola Copper Mines hostile investment policies budgetary gap agenda – can remain in power
Resource Nationalism Index Legend

Country
Extreme Low Largest export (% share of total gross exports)
Sources: Verisk Maplecroft; UNCOMTRADE © Verisk Maplecroft 2021

© Verisk Maplecroft 2021

Interventionism becoming more subtle, but equally disruptive

The usual suspects shown in Figure 1 are of no surprise. These are
countries most likely to resort to the bluntest instruments in the resource
nationalism toolbox, such as direct expropriations with no, or inadequate,
compensation.
As Figure 2 shows, resource nationalism is evolving differently in many

of the African and Latin American countries that saw the most acute
increases in risk on the index. Here, we are seeing state interventionism,
creeping expropriation and indigenisation emerge as the key
mechanisms. The countries to watch closest are the mining jurisdictions
characterised by both a painful Covid-related economic contraction
and a rise in these less explicit forms of resource nationalism. The
governments in these countries are becoming more willing to intervene
in the economy, use indirect expropriation, or demand increases in local
content requirements – opening the door to a more sophisticated, but
still disruptive, resource nationalism path.
Figure 2: Resource-dependent countries in sub-Saharan Africa and Latin America recorded the greatest
increase in risk in 2020
Source: Verisk Maplecroft © Verisk Maplecroft 2021

Miners will need to The countries undergoing some of the most pronounced increases in
stay on top of a much risk in the ‘less blunt’ indicators captured by the RNI are where risks will
more nuanced ESG intensify most in the post-pandemic drive to plug fiscal gaps. In 2020,
landscape to keep ahead of these included major mineral producers such as Mexico (ranked 14th
the resource nationalism highest risk globally for resource nationalism), Liberia (41st), Colombia
curve (44th), Mauritania (74th), Mali (85th), Chile (97th), and Canada (140th).
But going back to the tail end of 2019, we also witnessed this happen in
Brazil (53th) and Peru (117th).
In Latin America, greater pushes towards resource nationalism generally

hinge on two factors. In Mexico and Argentina, for instance, ideology is
the main driving force, while in Colombia and Chile pressure comes from
communities – both those hosting mining projects and civil society more
generally. In Africa, motivations are much more diverse. For example,
the interventionism seen in Liberia and Mauritania is driven by structural
governance shortcomings, not nationalist sentiment. In Mali, the political
concerns of the transitional government are the issue, while in Guinea it is
the need to maximise revenue from bauxite – both countries are looking
to review existing contracts.
When social pressure is the main impetus behind resource nationalism,

policy paths tend to be more nuanced – albeit not less disruptive for
miners. Indeed, the upcoming constitutional reform in Chile will debate
the extension of formal political roles to indigenous communities and
also water rights – including the potential ban of mining in glacial and
periglacial areas and the state’s ownership of water desalinated by private
mining companies. Property and concession rights remain a far-off
possibility, but changes to water rights are likely to increase the regulatory
burden and operating costs over the coming decade.
Miners to pay for populist response to new social demands

The economic effects of Covid alone cannot explain last year’s hike in
resource nationalism, but it did undoubtedly exacerbate a pre-existing
trend we’ve seen in the index since 2017. It is over the next two years that
its impact will bubble up sharply though.
Price cycles also remain an important factor, but miners will need to
stay on top of a much more nuanced ESG (environmental, social and
governance) landscape to keep ahead of the resource nationalism curve.
Issues around income distribution, poverty, access to education and
healthcare – to name but a few – can trigger socio-political processes
that demand more from the state.

By detecting the signals In rentier mining economies, turning to the industry to ask for (or take)
early on, miners can adapt more has become almost a knee-jerk reaction. But in more diversified,
investment strategies and emerging markets, the demands will almost always be more subtle and
exploration portfolios... come in different forms. Operators must prepare for the latter to overtake
classic methods of resource nationalism as the more common type of
state interventionism over the coming decade.
Calls for greater environmental, social and economic protection will not
only come from communities hosting projects, but also from the country
at large and from international stakeholders – including investors and
other countries.
Regardless of Covid-19, the trend of rising resource nationalism would

have continued deepening in 2021 anyway, particularly in jurisdictions
where interventionism delivers a political dividend. By detecting the
signals early on, miners can adapt investment strategies and exploration
portfolios to mitigate future exposure to countries where resource
nationalism trends are growing fastest. They will also be able to prioritise
investment commitments in jurisdictions where the industry can be part
of the solution, working with local stakeholders to find a balance between
community needs and industry profitability to secure long-term supply.

2020’s sting in the tail:

Political instability will rise in
88 countries
James Lockhart Smith David Wille
VP, Market Risk Principal Analyst, Market Risk
Instability to hit hardest in debt-burdened emerging market democracies,

Gulf states most exposed to destabilising ‘left-tail’ events
18 Verisk Analytics Official Public Information © Verisk Maplecroft 2020 | maplecroft.com Photo: Marcelo Hernandez/Stringer/Getty Images News via Getty Images
88/130
Political systems across the globe were battered in 2020. But what
comes next could shake the foundations of stability in a swathe of
countries as the Covid-19 crisis enters its final act.
countries are likely to
experience more instability Our 2-year Political Stability Index projections for 130 countries
by 2023 (simulation models which generate 10,000 potential outcomes per
country) are bleak. Almost three-quarters of these countries – ranging
from much of the developed world to leading emerging markets, such as
India, Brazil and Saudi Arabia – are likely to experience more instability
by 2023. Depending on where and how hard it strikes, this could at best
gum up policymaking, make the investment environment less predictable,
or erode countries’ ESG profiles. At worst, instability could disrupt all but
the most resilient firms, force governments into default, and block crucial
trade and commodity flows.
Foundations of government legitimacy under stress

worldwide
As Figure 1 shows, we project instability to increase in 68% of the 130
countries in our projections dataset. The risk will be largest for 23 nations
likely to experience a significant decline of over 0.5 in their score on our
index, including Brazil, Saudi Arabia, the Philippines, Ukraine and several
eastern European emerging markets. Our models suggest that most of
these countries are also at higher-than-normal risk of experiencing left-
tail destabilisation (see Focus box).
Figure 1: Our data shows 88 countries are likely to be more unstable by 2023-Q1, with many also facing
higher risks of left-tail destabilisation
Political Stability Index, 2021-Q1 8
Risk category:
Azerbaijan
Low Extreme 7
Probability of left-tail destabilisation (%)
Magnitude of left-tail destabilisation

6
Saudi Arabia
Latvia
5
Uruguay
Bahrain
Dominican Republic
China
4 Sri Lanka
This chart compares countries in terms of Austria Costa Rica
mean (average) projected changes in Panama

Nicaragua
political risk in each country over the next Guinea-Bissau
3
two years; how likely left-tail destabilisation Lithuania Philippines
Brazil
Suriname
is for each of them; and how much of a 'Normal' threshold Ukraine
move away on our Political Stability Index Belarus Romania
scale from the mean projected change that 2 Slovakia Sweden
Guatemala
destabilisation would imply. Throughout this Bosnia and
piece we define left-tail destabilisation as an Herzegovina
outcome that is two or more standard 1 Chile
deviations worse than the mean projected

score (see Focus box). As shown on this
graph, the probability of such outcomes in
normal or Gaussian distributions is 2.27%.
1.50 1.00 0.50 0 -0.50 -1.00 -1.50
Projected mean change in Political Stability Index score by 2023

Source: Verisk Maplecroft © Verisk
©Verisk Maplecroft
Maplecroft 2021
2021

Breaking down the main The central driver of risk will be fading legitimacy of governments
drivers of risk across the and intensifying civil unrest, as those in power struggle to engineer
components in our Political economic recoveries, answer for the human toll of the pandemic, or fall
Stability Index reveals a clear victim to internal political divisions (see Figure 2). For the small number
picture of countries expected to improve, such as Belarus, civil unrest will
simply be subsiding after a turbulent 2019-2020, in most cases without
demonstrators’ underlying grievances being addressed. China, which
moved fast enough against the virus to reopen quickly and had enough
economic firepower to mitigate the pandemic’s global macro impacts, is
a rare exception.
Emerging markets: short on funds

One key culprit for this global increase in political risk is 2020’s
extraordinary credit binge by leaders desperate to keep their economies
afloat – 84 countries in our dataset saw exceptional increases in their
debt-to-GDP ratios of at least 10 percentage points last year. As shown
in Figure 3, our data suggests that moderate borrowing has benefited
wealthier emerging markets such as Poland, Hungary and Thailand. And
unsurprisingly, developed markets borrowing in their own currencies
have little to fear from the bailiff. However, if some debt is good, more
isn’t better. The other high or upper middle income emerging markets
which borrowed the most last year will now be markedly more exposed to
political risks.
Figure 2: Eroding government legitimacy and intensifying civil unrest will be key threat to political stability
Groups of indicators in our Political Stability Index
Stability of basis for executive power

(challenges to legitimacy and infighting)
Frequency and impact of civil unrest
Mechanisms for the transfer of power
Mechanisms for channelling discontent

(between the state and civil society)
Drivers of civil unrest (economic and As societies revert to norms following a As the consequences of Covid-19 continue to
other) tumultuous 2020, reduced frequency unfold, challenges to the basis of executive
and impact of Civil Unrest is, on power and greater frequency and impact of
average, projected to drive Civil Unrest are, on average, projected to
History of instability improvements for 42 countries on our underpin deteriorations for 88 countries on
Political Stability Index by 2023-Q1. our Political Stability Index by 2023-Q1.
0.30 0.20 0.10 0 -0.10 -0.20 -0.30
Projected mean change in indicator score by 2023-Q1,

adjusted by weight in Political Stability Index
Source: Verisk Maplecroft ©Verisk Maplecroft

© Verisk 2021
Maplecroft 2021

Figure 3: Emerging markets walk fine line on debt
Emerging markets, high or upper middle income* Developed markets

Emerging markets, low or lower middle income* Other
Change in Public Debt Index score during 2020
Improvement or no change
Decline of up to 0.5 Thailand Poland Hungary
Decline of more than 0.5 Argentina South Russia

Africa
Decreasing risk Increasing risk
0.80 0.60 0.40 0.20 0 -0.20 -0.40 -0.60 -0.80
Projected 2-year change in Political Stability Index score
Source: Verisk Maplecroft © Verisk

©Verisk Maplecroft
Maplecroft 2021
2021
*As measured by World Bank income group
Our data indicates that A key signal for this eventuality is a significant decline in our Public Debt
some emerging markets Index, such as that witnessed by Argentina, South Africa, Romania – and
have benefited from Russia, where the Kremlin has so far opted to both borrow and scrimp
measured borrowing, more rather than draw down strategic fiscal reserves. Here, servicing
while excessive debt has higher debt burdens will have the highest potential to drive discontent
generated significant by constraining social spending and fiscal stimuli. And that’s without
political risk headwinds even factoring in the risk of any abrupt change from central bankers in
for others developed markets. Though not currently our base case, it would trigger a
major withdrawal of capital across emerging and frontier markets.
Democratic governance: muddling through

But if developed markets have little to fear from 2020’s credit spree, our
data suggests democracies will, on average, see more uniform declines
in stability, as shown in Figure 4. Their leaders have a tougher job – at
least in the immediate term – of managing the politics of a crisis that
is having a highly regressive impact on health and livelihoods. Many
have done so badly in curbing the spread of Covid-19 that public trust
in government has diminished significantly. This applies across many
countries, including DMs, but will impact political risk most in the weaker
or newer emerging market democracies, which feature heavily among the
23 nations with projected declines in their Political Stability score of 0.5
or more.

...wealthier free countries That said, the widespread but modest declines in score we project for
will probably emerge from DMs suggest that wealthier free countries will probably emerge from
the crisis bruised, but the crisis bruised, but without permanent injury. The US will likely even
without permanent injury rebound slightly, spared for now despite emerging from one of the most
disorderly transfers of power in its history. Possible exceptions include
the most indebted Eurozone suspects Italy, Spain and Greece, as well as
the UK, which faces severe economic pressures, and centrifugal political
challenges, stemming from Brexit and its chaotic management of the
pandemic.
Figure 4: Democratic governance to remain under stress, including in

emerging markets with weaker institutions
Our data shows that democracies will face the strongest headwinds overall, but with the
long-standing U-shaped relationship between democracy and stability set to endure, those
in the volatile middle will be at most risk.
10.00
3rd order polynomial
Political Stability Index score, mean projection for 2023-Q1
trendline with R2 of 0.59 Slovakia
Romania
7.50 Ecuador
Dominican Republic Spain
Italy
Costa Rica
United States
Panama
5.00
Paraguay
2.50
2.50 5.00 7.50 10.00

Democratic Governance Index score
IMPROVING
More democratic
1.00
Mean projected change in

0.50 Political Stability Index
score 2021-Q1 vs. 2023-Q1
-0.50
-1.00
DETERIORATING Volatile middle
-1.50
Source: Verisk Maplecroft © Verisk Maplecroft 2021

Focus Box
How our political risk projections quantify likely outcomes and tail risks
Our Political Stability projections, derived from a composite of our Government Stability and Civil Unrest
indices, generate full probability distributions of future risk – 6 months and 2 years in the future –
benchmarked to our index scales. That means we forecast not just the most likely outcomes, but also the
worst- and best-case scenarios, as shown in the example of Saudi Arabia’s 2-year Political Stability projection
in Figure 5. Peering into the murky left tails – closer to the worst-case scenarios than the mean – sheds more
light on what could go wrong, and why. In normal distributions, outcomes cluster around a central mean and
rapidly become less likely the further they move into the tails on either side – to the extent that only 2.27% of
outcomes occur two or more standard deviations to the left of the mean.
However, as with many of the complex ESG and political risks that we at Verisk Maplecroft assess, outcomes
two or more standard deviations to the left – which we define in this piece as left-tail destabilisations – are
more likely than normal assumptions indicate. More than 70% of countries have so-called ‘fat tails’ in our
latest 2-year projections, with probabilities of left-tail destabilisation significantly above 2.27%. Many also
have exceptionally long tails, indicating high levels of uncertainty and greater potential for abrupt shifts in risk.
Figure 5: How our index projections stack up against ‘normal’ probability distributions
12
Normal distribution with same
standard deviation ( ) and mean
10
-2 -1 Mean +1 +2
Probability (%)
Many countries have exceptionally

6 long tails, indicating high levels of
uncertainty and greater potential
The probability of
left-tail destabilisation for abrupt shifts in risk
is often significantly higher
4
than the assumptions of
'normal' distributions
would suggest
2
Saudi Arabia
0
0 2.50 5.00 7.50 10.00
Political Stability Index Projection, 2023-Q1
Source: Verisk Maplecroft ©Verisk Maplecroft 2021

©Verisk Maplecroft 2021

>4% Authoritarian countries: the sting in the tail

Firms and investors with exposure to seemingly calmer authoritarian
probability countries – many of which are staples of emerging market debt
of Saudi Arabia, Kuwait, portfolios and supply key global commodities – should generally worry
Qatar and Bahrain facing most about left tails. We expect risks to be highest in the Gulf.
left-tail destabilisation in Markets are pricing Saudi Arabia, Kuwait, Qatar and Bahrain favourably
our Political Stability Index thanks to their perceived comparative advantage in low-cost fossil fuel
Projection over the coming production, credit risk profiles and their ability to repress civil discontent.
two years Yet, our index projections show their fragility.
As shown in Figure 6, each receives at least a 4% probability of left-tail

destabilisation in our Political Stability Index Projection over the coming
two years – among the highest in our dataset. This stems from the
lack of effective mechanisms for channelling discontent, which makes
dramatic bouts of civil unrest more likely over the long term. Saudi
Arabia stands out with a 4.9% probability of seeing a drastic decline in
political stability by 2023-Q1. The kingdom ranks second-highest risk in
our dataset after Azerbaijan in terms of the combined probability and
magnitude of such outcomes.
Figure 6: Authoritarian political systems will be more vulnerable to left-tail destabilisation in 2021-22
Probability Magnitude
8 2.00
Azerbaijan 1.80
Probability of left-tail destabilisation (%)
7
Magnitude of left-tail destabilisation on
Saudi Arabia
1.60
Political Stability Risk Index
6
1.40
5 Saudi Arabia
1.20
India Qatar Kuwait Azerbaijan
Kuwait Bahrain
4 Bahrain 1.00
0.80 Qatar
3 India
0.60
2
0.40
1
‘Normal’ 0.20
threshold
0 0
Low Medium High Extreme Low Medium High Extreme
Risk category on Democratic Governance Index, 2021-Q1
Risk category on Democratic Governance Index, 2021-Q1
Source: Verisk Maplecroft ©© Verisk

Verisk Maplecroft
Maplecroft 2021
2021

We might be done with Trouble ahead

2020, but 2020 isn’t done We’re unlikely to see a traditional emerging market debt crisis, and its
with us political consequences, at least without a major hike in developed-world
interest rates. Nor should we expect the funeral of liberal democracy,
even as the last MAGA hats are swept from the Capitol. But investors
and firms still face a toxic brew of mounting political risks, albeit one
that is survivable for those with diversified cross-national exposures.
Watch out for non-contagious instability in the most indebted emerging
markets, especially weak democracies, and the further erosion of
political institutions in some European countries, potentially even the US.
And don’t overlook the elevated risk of left-tail destabilisation in major
authoritarian political systems. We might be done with 2020, but 2020
isn’t done with us.

China’s resource security

redrawing geopolitical map
Dr Kaho Yu
Senior Asia Analyst
China looking to shore up geopolitical vulnerabilities with shift towards

authoritarian natural resource producers

By securing diversified If China has a soft underbelly, it is its high dependency on foreign
sources, China will be in a natural resources. Plugging this gap through the diversification of its
better position to weaponise hydrocarbon and mineral supply chains has become a strategic priority
trade with geopolitical rivals for Beijing alongside its drive for self-reliance. Since China is shifting
the geopolitical sands to ensure this happens, the implications are far
reaching – not only for its major suppliers of strategic commodities, but
also for the extractive companies deeply invested in them.
Our data shows China is pivoting towards more autocratic regimes that
represent greater stability for its supply lines than democracies that are,
or may become, hostile to Beijing. But it is also using its massive market
as a source of diplomatic leverage. By securing diversified sources, China
will be in a better position to weaponise trade with geopolitical rivals,
while at the same time increasing the economic dependence of new and
existing partners.
China takes multipronged approach to import diversification

China’s import structure of key resources is highly concentrated with
a small group of trade partners (see Figure 1), and Australia is the
chief outlier among them. It is a close US ally, yet still a major supplier
of strategic resources, including met coal, iron ore and LNG. Given
their deteriorating bilateral relations and China’s imports restriction
on Australian coal in recent years, we believe Beijing has identified its
dependence on Australian resources as one of the areas most in need
of diversification.
Figure 1: Australia is the chief Australia

Brazil
Iron ore
outlier among China’s top South Africa

five suppliers of key strategic India
Ukraine
resources in 2020
Australia
Met coal
Mongolia
Russia
US
Canada
Turkmenistan
Natural gas
Australia (LNG)
Qatar (LNG)
Russia
US (LNG)
Russia
Crude oil
Saudi Arabia
Iraq
Brazil
Angola
0 10 20 30 40 50 60 70
% of total imports by origin
Sources: Global Trade Tracker, Wood Mackenzie ©©Verisk

VeriskMaplecroft
Maplecroft2021
2021

How China diversifies its imports and achieves its other resource security
priorities will come down to four strategies.
1. Diversification of suppliers: Other than having a cordial relationship

with China, political stability and regime type are the top two non-
commercial factors that Beijing will always take into consideration
when diversifying its supplies. Figures 2 shows that most of China’s
key resource suppliers are politically stable, as reflected in their
medium or low risk designations in our Government Stability Index
in 2021-Q1.
Beijing prefers suppliers from stable autocratic regimes over

democracies that involve frequent changes of governments and
potential shifts in policy. Autocracy is a governance system it is
comfortable operating with and can influence. As shown in Figure
2, Beijing can exercise this preference when it comes to oil and gas
imports because many of the largest hydrocarbon producers, such as
Saudia Arabia and Russia, are autocracies or illiberal democracies.
Figure 2: China pivoting towards authoritarian states for key strategic resources
China imports the majority of its oil and gas from stable, undemocratic states that are in line with its preferences, while most iron ore is
imported from democratic states that are unlikely to be Beijing’s top preference.
Democratic Governance Index, 2021-Q1 (LHS) Chinese trading partner preference Oil and gas (RHS)
Government Stability Index, 2021-Q1 (LHS) Low High Iron ore (RHS)
10.00 60
More stable
More democractic
Import value, 2020 (USD billions)

7.50 45
Index score
China's oil and gas imports are

well diversified among largely
5.00 stable, undemocratic states 30
China's iron ore

imports are dominated
by Australia, a stable,
strong democracy
Less democractic
2.50 15
Less stable
0.00 0
G
la
ia
a
lia
da
ile
US
lia
il
ar
n
ta
az
qu
ne
bi
si
di
ric
ta
Ira
PN
go
ss
nm
Ch
ra
go
na
Qa
ne
ra
In
is
Br
i
Af
bi
Ru
Gu
st
An
on
en
Ca
iA
ya
do
am
Au
m
M
ud
M
ut
In
oz
rk
So
Sa
M
Tu
Sources: Verisk Maplecroft; General Administration of Customs of the People’s Republic of China ©
© Verisk
VeriskMaplecroft
Maplecroft2021
2021

China is seeking to However, Figure 2 also shows that Beijing’s attempt to replicate this
strengthen its control over model for iron ore is complicated by the reality that many of these
global supply chains producers are democracies. Beijing has little choice but to cooperate
with them, regardless of their regime type. It explains why China has
been strengthening iron ore trade ties with countries as diverse as
Brazil and Guinea. Despite a tougher line on Beijing under President
Bolsonaro, Brazil remains a priority in China’s diversification strategy,
while Guinea is politically well disposed to Beijing amid democratic
backslide.
2. Diversification of investment: China is seeking to strengthen its

control over global supply chains via overseas investments and
partnerships with international majors. Beijing has been supporting
Chinese SOEs to ‘go global’ and establish control of resource bases
overseas since the late 1990s. For example, Figure 3 shows that
the number of Chinese-owned base metals and gold companies in
Oceania has grown from zero in 2000 to 59 in 2020. This approach
intends to increase the proportion of Chinese-owned resources in
China’s total imports.
Figure 3: Change in ownership of foreign base metals and gold

companies in Oceania (2000-2020)
Includes mining, smelting and refining companies
China Countries of interest Rest of world
2000 2020
28.0%
Rest of world 26.6%
22.6%
US 22.0%
+59 Chinese companies
Canada 17.7%
Japan 15.5%
14.2%
11.0%
Australia 9.9% 10.0%
9.2%
UK 8.4%
5.7%
China 0.0%
Source: Wood Mackenzie © Verisk Maplecroft

© Verisk 20212021
Maplecroft

By diversifying its natural 3. Diversification of transit routes: Geopolitical instability in the Middle
resource suppliers, China is East and the South China Sea has induced China over the past decade
increasingly reducing a key to diversify its seaborne imports with overland imports, as reflected
vulnerability... by its massive investment in energy pipelines with Russia and Central
Asia. The Myanmar-China oil and gas pipelines are another example
of China’s attempt to reduce its reliance on a sea lane that transits
through strategic chokepoints, in particular the Strait of Malacca.
4. Diversification of resources: For commodities with no immediate

alternative supplier, Beijing is actively seeking substitution strategies.
One method is increasing imports of scrap steel to use as a feedstock,
as a way to reduce reliance on imported Australian iron ore.
Greater resource security brings greater geopolitical

leverage
By diversifying its natural resource suppliers, China is increasingly
reducing a key vulnerability and strengthening its geopolitical levers.
Beijing sees three areas in particular that shift the balance in its favour.
Beijing will use trade as a coercive weapon: Through measures such as

import restrictions, China will be in a better position to use its massive
market as diplomatic leverage in great power competition. Resource
companies based in countries with frosty diplomatic relations with
Beijing are most likely to be on the receiving end of economic coercion.
This diplomatic tool is most effective when wielded against commodities
in which China has a diversified import profile and the target state is
dependent on the Chinese market.
Closer China-Russia ties will act as a counterbalance to the West:
Despite a history of mutual distrust, Russia and China’s economic and
political interests have converged over the past decade. Deteriorating
relationships with the West have driven the two countries to cooperate
closer in multiple areas, in particular energy. Increasing energy imports
from Russia will further both Beijing’s import diversification strategy and
Moscow’s ’Pivot to Asia’.
China-backed multilateral initiatives will favour Belt and Road partners:
Beijing’s diversification strategy will increase Chinese investment in and
trade with selected countries, mostly its Belt and Road Initiative partners,
which will in turn increase their economic reliance on China. Financing
terms, such as interest rate discounts and lower ESG requirements,
are more attractive to countries that are prioritising a quick economic
recovery over a ‘green recovery’ from Covid-19. These partnerships will
reshape multilateralism with an economic order that is more
China-centric.

Companies and investors Companies and investors in the firing line

are in the direct sights of Geopolitical tensions are not set to decrease any time soon, so China
Beijing’s diplomatic moves... is speeding up its efforts to reduce resource reliance on unfriendly
suppliers. Banning imports of coal from Australia was a prime example
but more are likely to follow, with significant impacts on the trade in
global commodities and the geopolitical landscape likely. Companies and
investors are in the direct sights of Beijing’s diplomatic moves and will
need to prepare accordingly.

Energy transition a political

risk nightmare for least
competitive oil producers
James Lockhart Smith Franca Wolf
VP, Market Risk Europe Analyst
Over half of net-oil exporters show weak diversification capacity, with

Algeria, Iraq and Nigeria least prepared for low-oil future

With the energy transition accelerating, and Covid-19 hollowing out any
recovery oil made over recent years, time is running out for a number
of countries that have failed to diversify their economies away from
exporting fossil fuels. According to our data, Algeria, Iraq and Nigeria will
be among the first casualties of a slow-motion wave of political instability
that will engulf the most exposed oil producers over the next 3-20 years.
But the likes of Angola, Gabon and Kazakhstan will also be swept up
unless they adapt to the oncoming threat that the global shift away from
hydrocarbons poses to them.
Figure 1: Stagnation nations lost crucial money and time by backpedalling on diversification before Covid-19
This chart shows that the exports of most net fossil fuel exporters became less diverse in the years between the 2014 oil price crash and the Covid pandemic;
and that they drew down heavily on their foreign currency reserves during the same period
80
United Arab Emirates Laos Ghana
Iran
40
Indonesia Paraguay
Kuwait Mongolia
20 Canada
Colombia
Norway
10
THE BAD
% change in FX reserves, 2013-2019
Australia Brazil
Oman
Myanmar
Equatorial Guinea
0 THE GOOD
Brunei Turkmenistan Congo
Trinidad and Tobago
Qatar
Ecuador Nigeria THE UGLY
-10
Russia Iraq
Bahrain
PNG
-20
Malaysia Saudi Libya
Arabia Angola
-40
Kazakhstan
Gabon DR Congo
Algeria Bolivia
-80 Azerbaijan
Venezuela
-80 -40 -20 -10 -5 0 5 10 20 40 80

Change in fossil fuel export revenues as a proportion of total export revenues: 2019 vs. 2000-2013 average
2019 fossil fuel export revenues as % of total merchandise export revenues, 2000 prices;
Bubble size: Net fossil fuel export revenues (USD)
>=70% 50-70% 30-50% 10-30%
Our calculation of changes in dependence on fossil fuel exports (x-axis and colour category) controls for movements in the price of fossil fuels relative to other
merchandise exports. FX reserve data was not available for Brunei, Myanmar, Turkmenistan, Trinidad & Tobago, Guinea and Congo, so these countries are plotted
at zero on the y-axis.
Source: Verisk Maplecroft, UNCTAD, Factset ©Verisk Maplecroft
© Verisk 2021
Maplecroft 2021

Recent devaluations are Those that don’t adapt could face step changes in credit risk and policy
a harbinger of the bleak or regulatory volatility as they enter doom loops of shrinking hydrocarbon
options ahead for oil revenues, political turmoil, and failed attempts to revive flatlining non-
producers – diversify, oil sectors. Mid-century price forecasts range between USD95 and just
or experience forced USD48, reflecting uncertainty over energy transition. In a low-oil future,
economic adjustments even the lowest-cost Gulf countries that are poised to capture market
share could eventually face a reckoning.
The good, the bad and the ugly

As Figure 1 shows, most oil-producing countries have failed to diversify
– or have gone backwards – since the 2014 oil price crash. Whether in
or out of OPEC, most exporters doubled down on production in the years
after to try and plug revenue gaps. Despite this, the majority took a hit on
their foreign exchange reserves anyway, including Saudi Arabia, which
has burnt through almost half of its 2014 dollar stockpile.
The handful of countries that have diversified are success stories that
can’t be easily emulated. Norway offers limited lessons for emerging
market counterparts. Qatar’s sustained focus on non-oil industrial growth
has begun to bear fruit, but its attempt to creep up the metals value
chain is still swamped by hydrocarbon exports. In others, notably Oman,
fossil fuel exports have shrunk in relative terms because of oil industry
problems, not because non-oil exports have thrived. Almost none have
reduced their dependence on oil by more than 5 percentage points.
This matters because it underscores just how hard export diversification

is – not just economically, but politically too.
For a few dollars (per barrel) more

When, if and how severely the storm hits each country will depend on
three key factors: break-even costs, the capacity to diversify, and political
resilience (see Figure 2). Alongside our Political Stability Index to assess
political resilience, we’ve used eight of our other proprietary risk indices to
measure corruption, human capital, business access to finance, respect
for property rights, and the quality of infrastructure as the most important
institutional determinants of diversification capacity.
Figure 2 shows how and why the energy transition could unravel the
status quo. Currently, if countries’ external break-evens – the oil prices
they need to pay for their imports – remain above what markets can
offer, they have limited choices: draw down foreign exchange reserves
like Saudi Arabia since 2014, or devalue their currency like Nigeria or
Iraq in 2020, effectively rebalancing their imports and exports at the
expense of living standards. Recent devaluations are a harbinger of the
bleak options ahead for oil producers – diversify, or experience forced
economic adjustments.

Figure 2: Net oil exporters will need to adjust – one way or the other
Diversification Capacity 241

None Moderate Ghana
Weak Strong 200
180
Bubble size: 160
Fossil fuels as % of 140 Brazil
exports, 2019
Colombia Cameroon
120
External break-even price, 2019 (USD)
Equatorial Guinea
This chart compares the external 100 Kazakhstan Algeria
break-evens of net oil exporters (countries
which export more than they import) to their Azerbaijan Bahrain
underlying levels of political stability and 80 Nigeria
capacity to diversify away from oil. Canada Oman Chad
Countries can get to a point where they no Russia
longer have a high external break-even –
60 Qatar
that is, they no longer need a high oil price Iraq Libya
Gabon
to balance their current accounts - either by Kuwait Saudi
building non-oil export revenues to replace Arabia
their oil revenues; or by undergoing forced
economic adjustments. Brunei Angola
40 Congo
Political stability and diversification capacity Norway
are calculated using Verisk Maplecroft
indices. Where the IMF provides external Ecuador
break-evens for countries, these are used; Iran Venezuela
and for other countries we calculate them UAE
by subtracting the current account balance
from net oil export revenues and dividing Adjustment via Forced economic
the result by the number of barrels exported diversification adjustment
during the year. 20
Low Medium High Extreme
10.00 7.50 5.00 2.50 0.00
Political Stability Index score, average 2016-2021
Source: Verisk Maplecroft, UNCTAD, IMF, OPEC, US Energy Information Administration © Verisk Maplecroft 2021
©Verisk Maplecroft, 2021
Our analysis suggests Our analysis suggests that many, if not a majority, of net oil producers are
that many, if not a majority, going to struggle with diversification largely because they lack the economic
of net oil producers are and legal institutions, infrastructure and human capital needed. Even
going to struggle with when such institutions are in place, the political environment, corruption
diversification or governance challenges and entrenched interests mean some may not
reform their way out of trouble, even where it is clearly the rational course.
Those most at risk will be the higher-cost producers with substantial
dependence on oil revenues, little capacity to diversify and higher levels of
political instability. If a storm breaks, it will break first in Algeria, Nigeria, Chad
and Iraq. It will be all the more disruptive here because of these countries’
fixed or crawling exchange rate regimes. Venezuela and Libya, in the feared
bottom right of Figure 2, have experienced state failure and economic
collapse for other reasons, but they show how bad things could get.
It is telling that most of the politically more fragile countries in the

‘medium’ political risk category in Figure 2 are also in the ‘ugly’ quadrant
of Figure 1, having both failed to make any progress on diversification in
recent years and lost much of their fiscal safety cushions. These are the
countries next in line for trouble as energy transition proceeds – not just
because of their high break-even costs, but because they will be first in
the firing line for majors looking to de-risk their portfolios.

Economic transformation Alongside Azerbaijan, these include a set of West African producers with
in some countries will fragile autocratic or semi-autocratic political systems: Angola, Gabon,
translate into opportunity, Congo, Cameroon and Equatorial Guinea. Again, all these countries have
particularly for multinational restrictive FX regimes that lay them more open to abrupt devaluations.
foreign direct investors and Russia and Kazakhstan, though with floating exchange rates, also belong
in private markets in this group, as efforts to diversify have been repeatedly frustrated by
politics and vested interests.
Low-cost Gulf states better placed for transition

For a fortunate few, towards the left of Figure 2, diversification looks
like an increasingly viable offramp. The UAE and Qatar, along with Saudi
Arabia and Kuwait to a lesser degree, are not only more politically stable
than most of their oil-producing counterparts, their economic institutions
and resources make them better able to diversify. They are also those
most likely to capture market share while energy transition unfolds, and
potentially even thrive if demand periodically outpaces supply through to
mid-century due to the collapse of new investment projects elsewhere.
Yet there is a major caveat when it comes to these Gulf producers.

Authoritarian political stability is anything but stable over the long term
and, as lower-for-longer oil prices cut into social spending, additional
pressure will pile on these deceptively fragile political systems. Even
diversification could come with its own political risks by challenging
traditional petro-state social contracts: legitimacy to rule in return for
hydrocarbon largesse.
Diversification or bust
As the energy transition train gathers pace, oil-dependent producers will
find themselves tied to the tracks. Some will escape in time, but our
data suggests a very high risk that many won’t. Adjustment to new
socio-economic realities will come for them via political upheaval and
market turmoil. Even some of those that do build alternative industries
will face elevated political risks as diversification undermines existing
social contracts.
The playing field isn’t entirely tilted against investors and corporates
though. Economic transformation in some countries will translate into
opportunity, particularly for multinational foreign direct investors and
in private markets. Spotting those that will successfully adapt quickly
enough to the new realities of a low-oil future will be the challenge
for them.

maplecroft.com
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Country Risk Analysis

Modern
Climate
Civil Our
Indigenous
Resource
Water Unrest
Stress| global
Change
Slavery
Nationalism
Peoples'
2021-Q1
| 2021-Q1 | risk
|Exposure
2021-Q1
Rights
2021-Q1data
| 2021-Q1
| 2021-Q1
Construct a custom risk framework to robustly benchmark, monitor and high-grade global risks, issues and
markets.
Climate Change Civil Unrest Resource Nationalism Water Stress Modern Slavery Indigenous
Exposure* People’s Rights
The index score is presented on a scale of 0.00-10.00, where 0.00 represents highest risk and 10.00 represents lowest risk. The risk category is based on the index score as follows:
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Verisk Maplecroft Political Risk Outlook 2021

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Verisk Maplecroft Political Risk Outlook 2021

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Political Risk Outlook 2021

2020’s legacy – debt, unrest and creeping volatility

2 Verisk Analytics Official Public Information © Verisk Maplecroft 2020 | maplecroft.com

Governments falling back on resource nationalism

Energy transition will catalyse political risk for least

3 Verisk Analytics Official Public Information © Verisk Maplecroft 2020 | maplecroft.com

...geostrategic China’s pivot to authoritarian states for strategic resources

US vs China – heavyweight match-up tops geopolitical billing

With China’s emergence as a rival superpower, the geostrategic

4 Verisk Analytics Official Public Information © Verisk Maplecroft 2020 | maplecroft.com

Executive summary: the age of flux and flex 2

Political Risk Outlook: Impacts at a glance 7

Geopolitical risk: US-China among flashpoints with highest probability of

Resource nationalism surges in 2020, Covid-19 worsens outlook 13

2020’s sting in the tail: Political instability will rise in 88 countries 18

China’s resource security redrawing geopolitical map 26

Energy transition a political risk nightmare for least competitive

Verisk Maplecroft: Country Risk Intelligence 37

5 Verisk Analytics Official Public Information © Verisk Maplecroft 2020 | maplecroft.com

Hugo Brennan Dr Kaho Yu

Jimena Blanco Franca Wolf

Mariano Machado Arun Pillai-Essex

James Lockhart-Smith Sam Haynes

6 Verisk Analytics Official Public Information © Verisk Maplecroft 2020 | maplecroft.com

Political Risk Outlook: Impacts at a glance

investors and business relating to the themes covered in this Negative -4 -3 -2 -1

year’s outlook, based on location, timeframe and likelihood. Positive 4 3 2 1

Definitions Likelihood Value

Geopolitical risk Geopolitical tensions between Global 0-6m Expected -2 -2 -1 -3 -3

Relative easing of geopolitical Middle East 0-6m Likely 1 2 1 3 1

US and China engage in a Asia-Pacific 6m-2y Likely -3 -3 -2 -4 -4

Resource nationalism Blunt interventionism Sub-Saharan 0-6m Expected -2 -3 -4 -4 N/A

Increasing regulatory burden Peru, Uganda, 6m-2y Likely -1 -2 -3 -3 N/A

Direct/indirect impact of Chile, Canada 2y+ Likely -1 -2 -2 -2 N/A

Political instability Threats to government Global, esp. 0-6m Likely -3 -4 -3 -3 -3

Left-tail destabilisation in Gulf, India, 6m-2y Remote -4 -3 -2 -4 -2

Hangover from pandemic Latin America, 2y+ Unlikely -4 -3 -2 -4 -3

Closer ties between Russia and Global 6m-2y Likely N/A -2 -1 -3 -3

China accelerates diversifying Global 2y+ Expected N/A -2 -2 -4 -4

Growth opportunities in UAE, Qatar, Saudi 2y+ Likely 1 4 4 2 2

Instability as economic UAE, Qatar, Saudi 2y+ Likely -2 -2 -1 -3 -1

7 Verisk Analytics Official Public Information © Verisk Maplecroft 2020 | maplecroft.com

Geopolitical risk: US-China

Potential fallout from a confrontation between the US and China should

The geopolitical situation Joe Biden inherits at the dawn of his

Country pair class definitions Legend

■ Cooling off: Country pairs that have Greece-Turkey 45%

■ Curve ball: Country pairs that you might

2020-Q1 2020-Q2 2020-Q3 2020-Q4 2021-Q1

Source: Verisk Maplecroft ©

9 Verisk Analytics Official Public Information © Verisk Maplecroft 2021 | maplecroft.com

58% Countering Chinese assertiveness will top new

Biden faces pressure from both sides of the Congressional aisle to

Figure 2: US-China verbal tensions 2012-2020

Sources: Verisk Maplecroft, GDELT Project © Verisk Maplecroft

10 Verisk Analytics Official Public Information © Verisk Maplecroft 2021 | maplecroft.com

our model flags the China stepping up pressure against US partners

The sharp deterioration in relations reflects a broader trend, where

Biden takes reins as US influence on the wane

Within this context, our model flags the Greece-Turkey pairing as

An outlier within our Interstate Tensions Model is the US-Russia pairing.