Political Risk
Political risk is the risk an investment's returns could suffer as a result of political changes or instability in a country. Instability affecting investment returns could stem from a change in government, legislative bodies, other foreign policymakers or military control. Political risk is also known as "geopolitical risk".
Definition: Political risk refers to the risk of investment returns being adversely affected due to political changes or instability in a country. This instability can stem from government changes, legislative shifts, decisions by foreign policymakers, or military control. Political risk is also known as 'geopolitical risk.'
Origin: The concept of political risk originated in the mid-20th century as globalization and cross-border investments increased. During the Cold War, the political instability in many countries made political risk a significant factor in investment decisions.
Categories and Characteristics: Political risk can be categorized into several types, including but not limited to:
- Government Change Risk: Risks arising from changes in government or policies, such as a new government altering foreign investment policies.
- Legislative Risk: Risks due to changes in laws and regulations, such as adjustments in tax policies.
- Military Risk: Risks from military conflicts or coups, which can significantly impact the investment environment.
Specific Cases:
- Case 1: During the Arab Spring in 2011, many countries in the Middle East and North Africa experienced political upheaval, leading to massive capital flight and significant losses for investors.
- Case 2: The 2016 Brexit referendum caused a sharp depreciation of the British pound, exposing businesses and individuals with investments in the UK to substantial currency risk and market uncertainty.
Common Questions:
- How to assess political risk? Investors can assess political risk by following international news, consulting risk assessment reports from professional agencies, and using political risk analysis tools.
- How to mitigate political risk? Investors can mitigate political risk by diversifying their investments, purchasing political risk insurance, and building good relationships with local governments and communities.
