Opinion

Political risk and the Philippines

BREAKTHROUGH - Elfren S. Cruz - The Philippine Star

October 27, 2016 | 12:00am

There have been recent concerns about the effect of the rhetoric of the Philippine President on foreign investments. There are certain things that the public needs to appreciate before engaging in this debate.

First, most businessmen understand the difference between rhetoric and policy. Second, multinationals are clear about the definition of political risk which oftentimes is a misunderstood concept by the media and the public. This has nothing to do with the type of government in the country. Third, investments are made primarily on the basis of potential return on investments.

Rhetoric by political leaders is not policy unless it is converted into laws or executive instructions. For example, anti-American rhetoric has not stopped American companies from investing approximately $75.56 billion in China. At the same time, while its political leaders may speak of possible war with the United States, Chinese investors are expected to invest $20 billion to $30 billion in the United States in 2016 compared with investments of $15 billion last year and $11.9 billion in 2014.

An American iconic landmark, the Waldorf Astoria Hotel in New York City is now owned by a China-based family business group. In Iran, American leaders are often called Satan during anti American rallies. Recently, it was announced that the Seattle- based Boeing has inked a deal to sell jetliners to Iran’s largest airline that could be worth up to $25 billion. It might be hard to imagine but even the most anti American Revolutionary Guards will be travelling in American-made planes sometime in the future.

Investment decisions are made based on many factors; and, it is true that the level of political risk is one of the factors. But it is important to understand this concept. Bear with me a little because the definition is a bit technical.

Broadly speaking, political risk may refer to any political change that affects the expected outcome and value of a given economic action by changing the probability of achieving business objectives. The focus is, therefore, the extent of government interference with business operations. Weston and Sorge wrote: “ Political risk arise from the actions of national governments which interfere with or prevent business transactions or change the terms of agreements or cause the confiscation of wholly or partially owned business property.”

One interesting observation is that the level of political risk in a given country does not necessarily correspond to a high degree of political freedom. Many business writers actually believe that some of the more stable states are authoritarian states. The risk here, however, is that in a politically oppressive environment, political stability is guaranteed for only as long as top down control is maintained.

Ian Bremmer is one of the world’s foremost political consultants. Here is what he wrote in one of his papers:

“ Political risk is composed of two elements: shock and stability. Shock isn’t a particular useful object of analysis because there are so many kinds and most are difficult to forecast and impossible to model. Who knows when an earthquake will hit Pakistan, the Israeli prime minister will suffer a debilitating stroke or the Hungarian prime minister confessing to lies will be leaked to the media? Such events can change a country’s balance of power and send markets tumbling.

By contrast stability is relatively easy to assess. Stability is the measure of a government’s capacity to implement policy during a political, social or economic crisis. Consider this scenario: A presidential election in country X generates controversy when much of the population questions the legitimacy of the official outcome.“

Within this framework, the Philippine government, especially its economic managers, has so far shown that it has the capacity to formulate and implement the policies necessary to maintain a positive business environment.

Types of country risks

Country risk is a more general term than political risk and is used to refer to the risk of lending or investing in a country, arising from possible changes in the business environment that may adversely affect operating profits or the value of the assets of the business in the country.

Investors also make a distinction between natural disasters and man-made risks. Natural risks refer to natural phenomena such as weather, earthquakes and volcanic eruptions that may negatively impact business conditions.

Among the man-made risks, there are two main groups: socio-political risks and economic risks. Socio political risks can be further divided into social risks, government policy risk and political risks. I have already discussed political risks.

Social risks refers to actions to actions from other organizations outside the government such as trade unions or political groups or terrorist groups. For example, while most of the country may be politically stable, certain areas may have radical Islamic groups or rebel groups that may target foreigners for kidnapping and other criminal activities.

Political mismanagement could also lead to heightened economic risks in the form of hyperinflation, sudden devaluation of the currency value and uncertainty in the regulatory environment of the country. Finally, the level of corruption is a major factor in determining the investment viability in any country.

In terms of actual policies – setting aside presidential rhetoric – the Philippines is still considered as a politically stable economy; and, the economic managers have done their job well in maintaining a stable and investment friendly economic environment in the country.