Political Risk Map 2020: Mid-Year Update for Asia-Pacific

As the region hit first by COVID-19, many countries in Asia-Pacific experienced a sharp rise in economic risk early in the year. Almost two-thirds (64%) of the countries rated by Marsh JLT Specialty’s World Risk Review (WRR) experienced an increase in their country economic risk rating of more than 1, between January and July 2020. In the same period in 2019, no country posted a rise of this magnitude. Only 23% of countries posted any increased economic risk.

While states such as China, South Korea, and Vietnam have received praise for their domestic handling of COVID-19, others have struggled to bring it under control. Despite an early lockdown, cases in India continue to rise, contributing to one of the largest increases in economic risk in the region.

Below, we provide an update on the region’s largest economies, China and India, along with Vietnam, a country that may benefit in the long term from other countries’ likely efforts to reduce their dependency on Chinese manufacturing.

COVID-19 has not altered the long-term trend of deepening military, political, and economic tensions between China and the US. Indeed, relations appear to be deteriorating at an accelerated rate, and this will be the key trend in Chinese foreign affairs through the remainder of 2020.

Hong Kong SAR, the South China Sea, Taiwan, and technological competition are all potential flashpoints in the two countries’ relations. For example, on May 27, 2020, US Secretary of State Mike Pompeo announced that the US believed that Hong Kong SAR was no longer autonomous from China, given China’s application of new national security laws on behalf of Hong Kong SAR.

The US subsequently introduced the Hong Kong Autonomy Act (HKAA), which imposes sanctions on banks that do business with Chinese officials who are involved in violating Hong Kong SAR’s constitution. In July 2020, the US additionally introduced sanctions on senior Chinese officials for their role in alleged human rights abuses in Xinjiang, and declared Chinese activity in the South China Sea unlawful.

Escalating measures taken by both sides will increase the risk that the Phase One trade deal reached in January 2020 will be repealed in part or in full. External relations with other Western economies may also be strained in 2020, as states increasingly choose sides in Sino-American confrontations. With China’s international reputation also weakened in some quarters by the pandemic, many will prioritize relations with the US, particularly on technology.

In July 2020, the UK announced a ban on the use of Huawei technology in 5G mobile networks. Other countries may yet follow suit. For example, Germany is expected to make a decision on continued use of Huawei technology in the autumn.

INDIA

Despite implementing a nationwide lockdown in March 2020, India has been one of the countries most affected by COVID-19. India’s early lockdown closed large parts of the economy. Even as measures have relaxed, the Indian economy faces a severe contraction over the next 12 months, particularly in the services sector, where domestic and international demand has collapsed. The service sector is the key driver of India’s economic growth, contributing 54% of GDP in 2018-2019. The country’s GDP is forecast to contract by 4.5% in 2020-21.

The economic impact will be deeper if the pandemic cannot be brought under control in the second half of 2020. As a result, India’s country economic risk rating increased by 1.4, from 3.5 to 4.9, in the first seven months of 2020 (see Figure 2).

India’s political stability is likely to endure in 2020, however. Prime Minister Narendra Modi occupies a secure position, with sufficient support to pass legislation.

His mandate should not be weakened significantly by COVID-19, given that state governments are largely responsible for handling public health. Nevertheless, this does increase the likelihood of disputes between state and central government.

Currency inconvertibility and transfer risk have steadily increased in India since the beginning of 2020, its risk rating rising from 3.9 to 4.2 in the year to July 2020. The exchange rate (INR/USD) has depreciated by 7% since January 2020, driven by emerging markets’ risk-averse sentiment. 

Record capital outflows from India occurred amid the pandemic. Between March and April, India had the third-largest capital outflows among Asian markets: Foreign institutional investor (FII) outflows totaled USD17 billion (debt and equity). This was higher than the FII outflows for the whole of 2019 (USD11 billion). The Indian rupee will continue to weaken in the next three months and average INR77.0/USD in 2020, from INR73.0/USD in 2019.

External relations with China are likely to be challenging for the remainder of 2020, following a border escalation between the two counties in June. The clashes led to the deaths of 20 Indian military personnel, and contributed to an increase in risk rating from 4.6 to 4.7. 

Following the confrontation, without directly mentioning China, India banned 59 largely Chinese mobile applications, citing national security concerns. Geopolitical rivalry in the Indo-Pacific region is likely to continue between the two countries in the coming years, ensuring that interstate conflict risks remain moderately elevated.

VIETNAM

COVID-19 is unlikely to materially weaken Vietnam’s political stability in 2020. The government has been praised by the international community for its handling of the pandemic, recording a relatively small number of cases and deaths. The country moved early to introduce travel restrictions, school closures, and contact tracing.

Alongside the absence of an effective political opposition, this success is likely to boost the position of the ruling Communist Party of Vietnam. Although Vietnam is expected to change leadership in 2021’s party congress, any incoming leader is expected to maintain the country’s focus on pro-business and reformist policies.

The Vietnamese economy will continue to be negatively affected by weak external demand among key trading partners, driven by the pandemic. Vietnam’s economy relies heavily on manufacturing goods for export, and supply chain disruption and collapsing consumer demand will weigh on the sector.