Country Risk Concepts: Shock & Stability

Political Risk has been analyzed through numerous frameworks (i.e. financial vs operational, inclusive vs exlusive, macro vs micro, etc). Shock and Stability is one of the frameworks employed by practicing political risk analysts. The terminology will be observed from the standpoint of a developing nation.

Stability refers to a nation's ability to maintain a stable economic, political, and social environment. This can been observed by their abilities to maintain average/expected levels of growth, to make progress towards justice/social development, to maintain sound economic policy, and to keep peaceful domestic/international affairs. An example of failed stability can be found in many early-developing countries that are re-gearing towards a more open economy while simultaneously struggling to provide essentials (i.e. food, electricity, water, education, democracy). These countries often struggle with high corruption and as a result, much of the investment capital never reaches the much-needed projects. This leads to a fundamentally unstable environment. Businesses can use a detailed analysis to mitigate risk exposure and to make long-term and short-term investment decisions.

Shock refers to a nation's ability to react and mitigate exogenous shocks. These shocks could be financial, social/protests, physical attacks, or natural disasters. A good example is the strategic, physical, and financial preparedness of small island nations from hurricanes and monsoons. If a nation were unprepared for a natural disaster, there will be a serious impact on its risk level. Many other examples of shocks, such as random terrorist attacks and financial crimes, are nearly impossible to predict and therefor more difficult mitigate. In general, shock is a challenging point to analyze because there are an infinite amount of disaster-scenarios that could be applied. As a result, when understanding “Political Risk” managers often emphasize stability.

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