Regulatory risk more of a threat to firms than political violence

6 June 2016

Risks from terrorism and military conflicts occupy the headlines but the financial uncertainty created by regulatory risk is a more significant threat to business, new research suggests.

Three times as many countries are affected by high or extreme levels of regulatory risk as they are by severe political violence, according to a study by Verisk Maplecroft.

This makes regulatory risk the most widespread political risk affecting global business today.

The 2016 Regulatory Risk Index found “high” or “extreme risk” to business in 90 countries. Regulatory risk consisted of a lack of respect for property rights, burdensome regulation and inefficient bureaucracies. Some 29 countries were severely affected by political violence.

Charlotte Ingham, principal analyst at Verisk Maplecroft, said: “From a business perspective, regulatory risks eclipse the challenges posed by terrorism and conflict at a global scale.

“Only a small proportion of countries are impacted by critical levels of political violence and, while this does threaten personnel, assets and supply chains, it is often only the most risk-tolerant of companies that operate in these markets.” 

The report adds that while violence tends to be highly localized, the negative effects of a poor regulatory environment usually extend across an entire country.

The countries categorised as posing an “extreme risk” to business are North Korea, Somalia, Zimbabwe, Cuba, Central African Republic, Syria, Venezuela, Turkmenistan and Eritrea.

Major natural resource producers were among the highest risk countries, including Venezuela (7th most at risk), DR Congo (10th), Myanmar (11th), Bolivia (14th), Nigeria (20th) and Angola (22nd).

The stability of regulatory environments was of particular concern to businesses with long investment cycles such as oil and gas, which are vulnerable to political changes.

Some of the world’s most prominent low-cost manufacturing hubs were also among high risk countries. These included Bangladesh (13th), Cambodia (15th), Indonesia (24th) and India (34th).

Regulatory risks could be as diverse as inadequate contract enforcement in Bangladesh, for example, to possible asset expropriation in Indonesia.

The most common factor is unevenly enforced regulation, which creates uncertainty around doing business.

A total of 33 countries are rated as “low risk” in the index, with Singapore the least risk, followed by Norway, Denmark, New Zealand and Sweden. 

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