From the CEO – December 2021

Dear Clients,
The final weeks of the year usually require us to look to the new calendar and offer some thoughts on what we might see as some of the risks or political undercurrents that might define 2022. PRS has never really offered a formal ‘top ten list’ of geopolitical risks for the forthcoming year, mainly because – and as our clients know – we provide 140-plus political, economic, financial (and composite) forecasts for a range of developed, emerging/frontier market countries and offshore commercial centers each month. Those that are successful in seeing their predictions come to fruition certainly deserve credit for their insight. Yet most offer up outlooks that are so vague and conditional they become almost meaningless.
In any event, there are several developments that should condition geopolitics, economics and investment finance over the next 12 months that are worth keeping in mind. These are not specific events as such (e.g., increasingly tense relations between the US and China) but more akin to trends that have a multitude of consequences and attendant risks.
First up, of course, is the connection between the effects of the pandemic and inflationary pressures, generated largely by supply issues. This has been well-documented over the past several months, so no repetition is needed here. However, what we can say is that increasingly higher prices for goods and services is not quite as uniform globally as we are perhaps led to believe via media reports. Indeed, a quick scan of our ICRG tables – those that detail inflation numbers for each country as well as those that assess the risks that are shaped by inflation (e.g., consumer confidence, currency values) – make it clear that there are quite a few countries where the trend towards higher costs are not quite evident. The implications here for investors, business, and applied academics are obvious.
The pandemic and the way in which it plays out over 2022 is also key in determining the future path of inflation. The consensus is that through vaccines, therapeutics, and other means of treating the disease, the variants will become endemic and not much different than seasonal flu. There are always worse case scenarios – e.g., a super virus that evades our immune systems and external treatments – but its effect on supply chains will diminish over time, as systems adapt and preferences for certain goods (and available substitutes) emerge.
More pressing for those countries dealing with inflation will be the policy rate adjustments by central banks. I’ll focus on the Fed. By several metrics – as well as a growing number of Fed officials – wrapping up its emergency bond buying program sooner than originally suggested seems on track, and higher interest rates might come as early as March. Yet there is some evidence that inflation – at least in the US – has peaked (cf., the recent drop in oil prices, weakness in the USD against some other majors) so the need for the Fed to bring in prices might not be as compelling as it is now assumed. We would suggest continued tapering would be in order next year but the assurance that rates will be lifted – especially in terms of the timing – shouldn’t be put on a clear timetable.
The effect of the pandemic has also resurrected the dividing line between developed and emerging markets that had been quite blurred for some years. Developed markets tended to be riskier on several fronts than their emerging market cousins, notably in terms of overall political stability (the general tenor of Congressional relations and social discontent under President Trump’s administration immediately comes to mind) and less-than-stellar health of their balance sheets.
Yet the rollout of vaccines, boosters, and the like have clearly been uneven, and I would suspect that the political risks that have been brought to light by the pandemic – from rising poverty levels, incidents of social turmoil and the use of state power, lack of trust in public institutions, fiscal and debt pressures – will become more pronounced in the emerging markets in 2022. One of the enjoyable things about the ICRG data is that they have been used in a wide range of studies associated with the effects of the pandemic, which has given our clients a unique baseline from which to assess political risk. No other geopolitical risk firm has been able to offer a dataset that has value from both an academic and applied perspective.
My final point on what 2022 might portend is also a consequence of the pandemic and concerns the viability of various multilateral institutions. Given its traditional function of providing balance of payments support to countries in need, the IMF will be seen as increasingly important in helping countries navigate their way to a presumed ‘pre-pandemic’ state. From the Fund’s decision to extend temporary increases, to the cumulative access limits under its emergency financing instruments, to more recent efforts to forge coherency to emerging cryptocurrencies, the organization will remain front and center in global affairs for the foreseeable future.
Other multilateral bodies, such as the WHO, while holding a different policy mandate, will be seen as relatively less relevant to a post-pandemic world. Public trust in institutions – not just international ones – has taken a significant hit over the past couple of years, and public bodies have a rather substantial task ahead of themselves in bringing citizens together to achieve various policy goals.
How governments do achieve such ends in turn raises the question of the nature of power going forward. As we all know, the rise of authoritarian regimes has been increasing in recent years, with President Biden’s recent Summit for Democracy being an attempt to shore up alliances and create at least a common framework for addressing emerging autocracies and issues such as corruption.
The one item that I’m quite clear on now – with the benefit of about two years of the pandemic – is that authoritarian regimes are no better equipped to handle pandemics than more open, democratic regimes. And they do less to stifle commercial activities and provide an important outlet for social discontent that has risen during various lockdowns. Such characteristics will be seen as vitally important as the pandemic eventually recedes and new ways of social interaction take hold.

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Turning to December’s ratings a few standouts are worth mentioning. In the Americas, President Bolsonaro has joined the center-right Liberal Party in preparation for an election faceoff against Lula, as Brazil’s inflation hits an 18-year high and as the central bank has purchased some 60 tons of gold during the first nine months of 2021.
In Western Europe, consumer confidence levels are expected to ease amidst the new COVID-19 wave, with a similar decline anticipated in Chancellor Scholz’s approval rating. Support for the governing party in Portugal is also dropping as infections rise, but the country’s level of inflation (at 2.6% yoy in November) being one of the lowest in the EU.
Over in Eastern Europe, Iceland’s Jakobsdottir enjoys the support of over half of those surveyed recently, but an outbreak of COVID-19 among lawmakers threw a momentary wrench into the workings of parliament. Meanwhile, the IMF sent just under $600mn to Moldova in aid, and the country is in talks with Romania about a mutual defense treaty in the event Russia stages an invasion of Ukraine in the months ahead.
In Africa, Ethiopia’s government says it won’t go further into Tigray territory for now, as the US cancelled the country’s duty free trade access given the conflict. And some proponents of democracy cheered when Gambia staged a successful and relatively peaceful presidential election with the incumbent garnering some 50% of the tally amidst a healthy voter turnout.
In Asia, Malaysia’s COVID-19 cases are falling and growth estimates have been revised upward along with projections for FDI. In Myanmar, the US is under pressure to sanction the country’s gas sector since it’s been used to help fund the junta.
Finally, in the Middle East, foreign exchange reserves are on the rise in Iraq; protests forced the governor of Najaf from office; and Sudan’s security forces fired on protestors demanding a return to civilian rule. Opposition to the current regime is growing, and the current PM is expected to resign.
We have received considerable demand for our recently-released new addition to our popular Researchers’ Dataset series – one that offers clients a more granular look at the political risk components of the ICRG, supported by 20 years of monthly data. The new series works as an excellent complement to the other data bundles announced this year affecting ESG, corruption, and internal/external conflict. Scores of academic studies have been conducted using these series, providing unique insights in asset volatility, government responses to the pandemic, and many more. Contact us for more information.
Our new book Quid Periculum? Measuring & Managing Political Risk in the Age of Uncertainty, co-edited and co-authored by Peter Marber (Harvard/Aperture Investors) is now available! The book includes such diverse topics as risk forecasting techniques, reliability measures, the impact of political risk on asset prices and sovereign debt workouts. Also featured is a special roundtable discussion by some of the world’s leading voices in the field on the future of political risk, who combine to address some of the challenges presented by globalization and COVID-19. Quid will be available for purchase on Amazon early in 2022.
December was another fruitful month for new and returning clients, ranging from some of the world’s top universities to the largest institutional investors throughout the US, Europe, the UK, and the Middle East and Asia. Institutions from China have been among the largest consumers of our data. Our ICRG data continue to be featured regularly in the work presented in the National Bureau of Economic Research (NBER), and in a range of central banks, from Greece to Paraguay, from Nigeria to Ecuador.
The new look of PRS is coming soon, too. Paying homage to our roots in the Hindu Arabic number system of the Renaissance period to more recently in the behavioral revolution of the late 1960s, one of our new features will be a regular podcast series, featuring interviews and discussions with some of the most distinguished practitioners and academics in the field of geopolitical risk, from such places as Saudi Arabia, Uzbekistan, the UK, and Dubai. No other podcast series will offer such depth, relevance, and intellectual sophistication. Stay tuned.
Not only is ICRG being used by some of the world’s largest technology firms, but the data are now being incorporated increasingly into the artificial intelligence/machine learning sector, with an emphasis on ESG data! On the latter, ICRG is now the sole source of geopolitical data inputs into some of the risk products offered by RepRisk – the Swiss-based pioneer and leader in ESG data science.
Our ICRG political risk scoring changes were very robust in December, affecting some 70 countries (of 141) and some 100 individual political risk metrics!!
ICRG and related PRS data continue to be the gold standard of all geopolitical risk data among the scholarly and research communities. In a recent study made available as part of the IMF’s Working Paper Series, a range of our ICRG political risk metrics were used to construct a new index affecting perceptions of corruption. This enhanced system offers the advantages over previous indices measuring graft by being available at higher frequencies and being more sensitive to current events. (https://bit.ly/3z7gk8e)
Additionally, our corruption data were used as the main explanatory variable in an early study that evaluates whether the level of public corruption influences COVID-19 case fatality rates. Using cross-section data – including 64 countries and multiple regression techniques – it was found that that the level of corruption is positively and significantly associated with COVID-19 human costs. These results are robust to control of other possible explanatory factors. (https://bit.ly/3HmfhEp)
Thanks for your continued support, and please contact us if we can be of any assistance.

CHRISTOPHER MCKEE, PHD CHIEF EXECUTIVE

Christopher McKee is PRS’ CEO and Owner. An international political economist, global investor, entrepreneur, and author, Chris received his PhD from Queen’s University (Canada) and has been involved in the field of geopolitical risk, limited recourse financing, and private sector development for the past 25 years.