How political risks will make exports suffer

Election. Change of new government. Civil war. Economic crisis. These are some of the political scenarios that may cause costly disruptions and delays in getting business done for Singapore companies.

But when a company is conducting cross border business – whether investing, financing or trading – the likelihood of being exposed to some form of political risks is even higher.

There is no single definition of political risks but it can be described as the uncertainty resulting from decisions or events of a political nature that will affect the business climate and cause a company to suffer economic and financial losses. In short, the impact of politics on market outcomes.

Why exporters overlook political risk coverage

Most Singapore exporters are more concerned about the credit risk of the counterparty and ignore the impact of political risk when trading. Some of the reasons why they do not prioritize political risk coverage include:

• Lack of familiarity
• Perception that political risks are manageable and there’s low probability of occurrence
• Insurance premium is too high
• Coverage in high risk countries are not consistently available
• Concerns regarding insurer’s willingness to pay
• Insurance provider does not cover the type of risk concerned

Managing political risks

As Singapore businesses expand their reach to other markets and export to countries where the political landscape is unstable, it is vital for them to manage risks and protect themselves from payment insolvencies by looking into the following risk mitigation methods:

Internal Assessment and Review

Just like the conduct of credit review and analysis of buyers, it is beneficial for companies to also conduct regular review and assessment of countries where they are doing the bulk of their transactions, and also potential new markets.

For example, if it is learnt that a particular country could be facing severe shortage of foreign currency and the possibility of foreign exchange control, then it may be wise for the company to change to another payment mode or terms when trading with buyers in a specific country. Political and country risk reports are easily available in the market from the various information providers.

Engaging Risk Consultants

This is a useful tool especially when performing due diligence and conducting a feasibility study before the signing of major long term contract with new buyers in emerging markets, particularly involving the exports of capital goods and equipment. The input provided by the consultants allows the company to see the potential risk areas, enabling them to address these and make informed decision about the transaction.

Political Risk Insurance

Political risk insurance protects the balance sheet of businesses, thereby, avoiding catastrophic financial loss due to business interruption and non payment arising from political events such as strikes, riots, civil commotion, terrorism, sabotage, war and/or civil war, embargo and currency inconvertibility.

Having such a policy shields companies from risks that may put strain on the company’s financial operations and hinder its overall financial growth.

Conclusion

Timely payment from an overseas partner is already a challenging task. When combined with risks that are political in nature, the chances of financial loss are even greater. For security and peace of mind, exporters should look beyond the traditional credit insurance and give equal importance to political risk coverage.