Responding to demand and realising growth in a complex world

Farmers are harvesting on rice terraced at Mu cang chai, Yen bai, Vietnam

A series of crises in recent years have led to a heightened perception of trade and investment risk, particularly credit, performance, and country risk. At the same time, pandemic-delayed infrastructure development, the transition to a lower-carbon economy, food and energy security, and increased defence spending are driving demand and generating significant opportunities for trade and investment in almost every industry sector and region.

For many companies, the ability to respond to this surge in demand and realise growth opportunities has been hampered by perceived uncertainty in developed and emerging markets and limited access to liquidity. However, uncertainty surrounding trade and investment risks can be better understood with data and in the context of defined perils, which enable the implementation of robust risk mitigation strategies, thereby improving businesses’ clarity and confidence. These strategies, combined with the recognition of key positive macro-economic indicators, can enable companies to realise growth and secure capital in a complex environment.

The impact of food and energy insecurity

Key drivers of the heightened levels of risk and political instability — from the Russia-Ukraine conflict to climate-driven events — have resulted in a wave of price shocks, unsettled food and energy prices, and created a volatile outlook for many markets. This has contributed to pressure on credit risk exposures and added uncertainty for businesses in what was already a challenging post-COVID-19 risk environment.

To some extent, the current situation echoes the price conditions that were a central cause of the Arab Spring protests of 2011 — something unforeseen by many at the time, but the risk of which could reasonably have been forecast given the data available.

These echoes are particularly evident in Marsh’s World Risk Review ratings, which show a notable — though less significant — increase in recent intra-state conflict, supporting a continued link between price fluctuations and political stability. Further highlighting this connection, the Global Risks Report 2023, published by the World Economic Forum in collaboration with Marsh McLennan, identified the cost-of-living crisis — of which food and energy prices are key components — as the most severe short-term risk (on a two-year horizon) for businesses and governments.

Despite similarities between this price environment and perceptions with previous eras of instability, there are also unique signs of resilience: foreign currency reserves, for example, are up in many countries, and the extractive and resources sector is seeing record growth. With reference to historical knowledge and current data, companies can better understand the secondary impact of price risks, protect existing investments, and take advantage of available growth opportunities.

Considering food and fuel dependencies

The extent to which price shifts in certain essential goods may impact specific countries can be correlated with several factors: the level of dependency on imports to meet domestic demand, the nature of the government, and relative economic capacity.

Once the links between rising food and fuel prices, import dependency, and government type is established, two questions arise:

Which countries have significant dependence on food and/or fuel imports?
Which of those countries are particularly susceptible to political instability?

Based on data from the Food and Agriculture Organisation and the Energy Information Administration, the chart below shows which countries depend most on food and energy imports. Marsh client inquiry data indicates that of these countries, several continue to receive significant investor interest. Two of these countries, Egypt and Peru, face persistent instability risks complicated by the current price environment, but also continue to offer significant investment and trade opportunities.

^{Source: UN FAO and US EIA}

Authoritarian and semi-authoritarian countries with joint import dependency

Egypt: Vulnerabilities exposed

As in many countries, high global food and fuel prices have greatly affected Egypt’s economy, compounding inflation and public dissatisfaction. The Russia-Ukraine conflict has exacerbated Egypt’s situation in particular; prior to the conflict, 80% of Egypt’s food imports came from Russia or Ukraine. To manage the domestic impact, the government is expected to spend US$4.14 billion on food subsidies through June 2024.

Maintaining the subsidy program while the country continues to be at risk of a balance-of-payments crisis, however, will be difficult. Egypt’s typical financial backers, the Gulf States (GCC), are working with the International Monetary Fund (IMF) to encourage the Egyptian government to implement structural reforms before further investments are made or IMF funds disbursed.

^{Source: UN FAO}

Egypt: Cereal import dependency growth over the past decade

The Egyptian government, however, has been slow to implement some of the agreed reforms, including fuel subsidy reduction and large-scale privatisation, as it recognises that doing so could potentially lead to civil unrest or pushback from the army, which has large stakes in several industries.

Despite these concerns, economic imperatives have encouraged the government to pursue privatisation where possible and sales momentum has been growing. The finalisation of more than US$2 billion in recent deals underscores continued investor interest in, and awareness of, available opportunities.

In many respects, Egypt’s current environment reflects the global one: a mix of price-driven risks and uncertainties combined with significant growth potential. The companies best placed to seize this potential will focus on key demand and growth sectors, and use available data and historical analogies to inform robust risk management and distribution strategies.

Peru: High prices fuel frustration

Peru’s economic situation appears to have a lesser degree of fragility than Egypt’s, yet the country’s cereal import dependency is greater and political risks are elevated. Cereal imports were above the historical average in 2022, and half of Peru’s population is considered moderately food insecure. Protests in the past year have been linked in part to frustration with perceived government inaction on the issue.

^{Source: UN FAO}

Peru: Cereal import dependency growth over the past decade

Peru also relies increasingly on fuel imports. In 2011 Peru produced 75% of its domestic oil needs, but that figure dropped to less than 50% in 2021. Fuel shortages contributed to protests in late 2022 and early 2023, which disrupted mining activities and sent the price of copper — a major Peruvian export — up more than 20%. Further spikes in global fuel prices could contribute to political instability and economic disruption in the country.

Though deep political polarisation has limited the ability of Peru’s government to respond to these challenges in recent years, exports have nevertheless nearly tripled since 2010, indicating the economic opportunities available to businesses. Given Peru’s mineral reserves, these economic opportunities will become increasingly attractive as the energy transition accelerates. By working with public and private agencies, investors can intelligently distribute their political risk while helping Peru achieve its full extractive potential.

Credit risk mitigation strategies amid a changing world

As the cases of Egypt and Peru highlight, political and economic volatility can impact the perception of returns on capital and the security of assets for corporates and investors, despite the significant investment opportunities available. This perception of uncertainty, however, may lead to a more conservative evaluation of the underlying resilience and/or potential returns than the data supports.

In this environment, savvy companies and financiers are increasingly looking to understand risk and develop risk management and allocation strategies that enable growth opportunities to be realised. Insurance has a key role to play in these strategies.

Areas of activity that directly enable trade and investment growth through greater access to liquidity include:

Surety for performance risk, including delivery, production, and collateral obligations. Many companies and banks are increasingly using surety to replace or sell down the risk of letters of credit, improve liquidity or extend lending lines, and unlock working capital for further investment.
Trade credit insurance to provide confidence to trade with new customers and secure trade finance by underwriting the risk of non-payment from customers.
Structured credit to help banks extend lending lines. This is an established tool for corporates and their lenders to secure access to alternate capital for strategic developments, particularly as interest rates rise.
Political risk insurance to reduce the impact of loss arising from government actions and thereby reduce the country risk premium and enhance internal rates of return. Political risk insurance can also help companies manage the downside risk of contracts being frustrated by government action, thus enabling businesses and shareholders to proceed with greater confidence.

Signs of resilience

The sense that the world is in an exceptionally volatile and uncertain economic moment has dominated much mainstream media discourse in recent years with comparatively little attention given to identifying positives among the challenges. Actual global economic performance, however, has regularly outperformed often grim predictions, highlighting signs of resilience in the macro-economic environment that should encourage optimism.

Commodity prices have fallen significantly from peaks in 2022, and core inflation has dropped steadily. Many emerging markets are much better positioned to manage a crisis than in the past, should one arise; foreign exchange reserves are up and the amount of debt held in foreign currencies is down.

Four driving forces will continue to support these positive economic indicators: a post-COVID-19 backlog of infrastructure investment, a reconfiguration of food and energy supply chains, the transition to a lower-carbon economy, and defence spending. These growth areas are helping to overcome much of the predicted economic stagnation and are likely to have lasting implications for the resilience of developed and emerging markets.

The corporates and lenders with well-developed risk management, distribution, and allocation strategies will be best placed to respond to global demand in this complex environment and capture growth amid uncertainty.

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This publication is not intended to be taken as advice regarding any individual situation and should not be relied upon as such. The information contained herein is based on sources we believe reliable, but we make no representation or warranty as to its accuracy. Marsh shall have no obligation to update this publication and shall have no liability to you or any other party arising out of this publication or any matter contained herein. Any statements concerning actuarial, tax, accounting, or legal matters are based solely on our experience as insurance brokers and risk consultants and are not to be relied upon as actuarial, accounting, tax, or legal advice, for which you should consult your own professional advisors. Any modelling, analytics, or projections are subject to inherent uncertainty, and any analysis could be materially affected if any underlying assumptions, conditions, information, or factors are inaccurate or incomplete or should change.
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