When political scenarios of a country bring sudden changes in its financial and foreign trade policies, it can cause unrest among the foreign investors that help their markets grow. When such a risk becomes a frequent threat for foreign companies and organizations, they fear huge financial and asset loss. This can either lead to loss of opportunity presented by emergent markets or huge losses that can cripple the business operations from running.
Such risks that arise because of changing political situations are called political risks and an insurance cover for the same must be sought after if your company is involved in any form of investment or trade with an international market.
Many exporters and infrastructure developers in Australia buy political risk insurance as a part of their personal or credit insurance from Niche Trade Credit to cover financial losses that they may bear due to political instability affecting their operations in the foreign market. This is especially important when you are dealing with underdeveloped or developing markets and when you are trading with countries where political scenarios are highly unstable because of acts of corruption.
Political risks – Types and ways to mitigate them
Government interference or expropriation:
- Any change in regulatory requirements can result in confiscation of the properties and expropriation of foreign investments.
- This results in loss of foreign assets, investments, and even the flow of working capital.
- Extreme diligence is required to work in such markets for the fear of huge losses.
- Civil wars, riots, and acts of terrorism can result in a declaration of emergency.
- This can prevent your organization from conduction business operations altogether.
- Sometimes during such riots and protests, multinational investments face destruction due to agility in the protestors for their governments favor foreign investors over domestic ones.
- When developing or underdeveloped countries face severe economic crises, currency conversions get highly affected.
- In such cases, your business will not receive payments on time which can affect the functioning of your operations because of loss of cash flow.
- In extreme scenarios, the government can also impose a temporary ban on the exchange of hard currency that can cause huge financial losses for the investor.
Steps that you can take to mitigate these risks for safer expansion
- Conduct research and measure any ongoing financial risks before dealing with investments in international markets.
- Diversify your foreign investments in different emerging markets rather than concentrating on just one.
- Create contingency plans and share them with all your stakeholders for better mitigating of risks.
- Keeping a budget reserve for maintaining continuous cash flow will prevent your business operations from crippling under stressful situations.
- An insurance plan that underwrites various forms of political risks is essential to receive compensation if you face any financial losses.
Most of the businesses who are involved in foreign lands get benefits from the international government regulations for they promote the growth of their market and create employment in their country. These benefits are very important if you are looking forwards to expand your business reach to newer markets where it is easier to grow because of less competition.
If you can safely mitigate the political risks, emergent markets can provide you with an amazing platform to reach newer heights in your business growth.