Measuring geopolitical risk

Summary

The transcript discusses the escalating geopolitical risks and uncertainties impacting Canadian exporters. Global instability, fueled by tensions such as U.S.-China conflicts, military coups, and ongoing wars, is affecting international trade and business conditions. The video highlights the growing challenges of measuring and mitigating these risks through methods like credit ratings and bond spreads. As global tensions rise, emerging markets face higher risks, and Canadian exporters must adapt to these changing dynamics. The video also touches on the role of elections, the U.S.-China relationship, and the evolving global economy in shaping the future of international business.

Takeaways

• 😀 Geopolitical uncertainty is a growing concern for Canadian exporters, with global instability at levels unseen in over 50 years.
• 😀 Tensions between the U.S. and China have led to confrontations in key industries, especially in Southeast Asia and the South China Sea.
• 😀 There are currently two major ongoing wars, along with increasing political instability in regions like West and Central Africa, where military coups have surged since 2020.
• 😀 Rising political extremism, fueled by a global cost-of-living crisis, is contributing to populism and political instability worldwide.
• 😀 Upcoming elections in 76 countries could increase protectionism and geopolitical uncertainty, particularly in major markets like the U.S.
• 😀 The possibility of a second Trump administration could heighten uncertainty in areas such as trade, security, and climate change.
• 😀 Generational challenges, such as demographic shifts, technological innovation, and climate change, continue to pose long-term risks for global business.
• 😀 Traditional financial indicators like the VIX and commodity prices no longer fully capture geopolitical risk, with alternative financial instruments becoming more common.
• 😀 Bond spreads, which indicate the cost of capital in riskier markets, provide a key signal for assessing geopolitical risk, with rising spreads often signaling deteriorating business conditions.
• 😀 Countries such as Ecuador, Kenya, Lebanon, Pakistan, and Poland have seen significant increases in bond spreads, reflecting heightened geopolitical risk.
• 😀 EDC Economics predicts that geopolitical risks will intensify in 2024 and beyond, with ongoing conflicts and elections contributing to further uncertainty.

Q & A

What impact has the escalation of geopolitical tensions had on global instability?

Geopolitical tensions have significantly increased global instability, reaching levels not seen in at least 50 years, affecting Canadian exporters and businesses operating internationally.

How can businesses measure and convert geopolitical risks into costs?

Businesses can measure geopolitical risks by assessing country credit risk ratings, bond spreads, and using financial instruments to track market volatility. These methods help translate the risks into tangible costs to inform decision-making.

What is the significance of U.S.-China tensions in the current global geopolitical landscape?

The escalating U.S.-China tensions have led to confrontations in strategic industries, simmering disputes in the South China Sea, and competing influence efforts in Southeast Asia, all contributing to broader global instability.

How have military coups in West and Central Africa changed since 2020?

Since 2020, there have been eight military coups in West and Central Africa, a significant increase compared to less than one per year in the preceding decade, contributing to regional instability and impacting business operations.

What is the relationship between political extremism and the global cost-of-living crisis?

The global cost-of-living crisis has contributed to the rise of populist and extremist political movements worldwide, except in Australia and Antarctica, influencing political discourse and global economic conditions.

What is the potential impact of upcoming elections in 2024 on global markets?

With 76 countries set to hold elections, representing over half of the world's population, there is an increased likelihood of protectionist policies and further uncertainty in global markets.

How could a second Trump administration affect U.S. international relations?

A second Trump administration would likely bring increased uncertainty in areas like trade, technology, security, and climate change cooperation, intensifying geopolitical risks for businesses.

What challenges are businesses facing in dealing with generational issues like technological innovation and climate change?

Businesses must adapt to societal challenges, including exponential technological advancements and the urgent need to address climate change, both of which create additional uncertainty and risks for companies.

Why is the VIX not a reliable indicator of global risk at the moment?

The VIX, which tracks market volatility, has been unusually low, below its historical average, and may not accurately reflect global risk, partly due to alternative financial instruments used to track market volatility.

What do bond spreads indicate about country risk and geopolitical events?

Bond spreads indicate the additional return investors demand for taking on the risk of investing in sovereign or commercial entities from a particular country. These spreads react sharply to geopolitical events, such as Russia's invasion of Ukraine or the Hamas attacks.

How have emerging market countries been affected by rising bond spreads?

Emerging market countries, particularly in regions like emerging Europe and Africa, have seen significant increases in bond spreads, signaling higher risks and the growing cost of capital due to geopolitical instability.

What are the key factors that will drive geopolitical risk in 2024?

Geopolitical risk in 2024 will be driven by ongoing conflicts in Ukraine and Israel, an historic number of elections, escalating international tensions, and increasing domestic unrest, all of which will contribute to greater uncertainty for businesses.