In late May I was happy to deliver one of the keynote addresses to spring meeting of theCentre international de formation européenne (CIFE) in Nice. Talking about ways to quantify geopolitical risk engendered a lively debate and Q&A sessionafterwards and I was particularly struck by the depth (and nature) of some of the questions asked of me by the students.
Of course, many of those in attendance are at the beginning of their careers and so were interested in knowing how my views of the world have been colored after spending close to thirty years in the geopolitical risk business. I tried to put things into an historical context, drawing on the experiences of both mytime in the field but also in relation to world events during the 20th century and before.
I mentioned in particular that the period from the late 1980s to the terrorists attacks of9-11 were quite unusual in world history (viz., a time of relative peace and prosperity, aka Fukayama's "The End of History") and what we are seeing today with the wars in Ukraine and between Israel and Hamas are not out of the ordinary. By extension, I mentioned that during the Second World War, commerce continued, and people carried on with their lives. Precautions weret aken; risks were managed. We should therefore see the world through the samel ens as those that came before us and see risk not as something to be avoided at all costs, but as a part of our lives, to be embraced and managed.
At the conclusion of the event I was also pleased to present - along with Dr Michel-Henry Bouchet, Emeritus Global Finance Professor at SKEMA Business School – the CIE-PRS Group prize to the students for the best country risk report. The winners conducted avery interesting piece on sustainable tourism in parts of Latin America. We are looking forward to having some of thestudents participate in our summer internship program.
On a similarly pleasant note, that evening a very nice dinner was held for some of the conference participants, with a discussion that moved from the impact of Da Vinci on military warfare to the extent to which the Middle Ages did indeed provide someof the impetus to the blossoming of knowledge and creativity that occurred during the Italian Renaissance. The two hour reunion passed quickly.
Next year, we will be expanding the Nice conference to include some ofPRS' clients, practitioners from Europe especially, and some specialists invarious and more nuanced areas of geopolitical risk (limited recourse financing, cybersecurity, etc.).
On a related note, the academic literature continues to provide considerable fodder for the application of our ICRG data. For example, in an interesting and recently published piece from the National Bureau of EconomicResearch, our ICRG data was used in part to find that, expropriation risk, such as corruption, negatively impacts innovation by reducing R&D expenditure, human capital in R&D, number of patents, scientific publications, and the Economic Complexity Index – a proxy for technical progress. The findings highlight the detrimental effects of expropriation risk on innovation and economic development at the country level.
Furthermore, using an array of our ICRG data, another study in the Working Paper series designed to assess the resilience of emerging markets’ performance across monetary easing and tightening cycles, it was found that macroeconomic and institutional variables were associated with superior functioning. Institutions mattered during difficult times, as well as current account balances, international reserves, and inflation
Here are the links to the articles if anyone is interested:
(https://lnkd.in/eKC2tMRJ);(https://lnkd.in/edMB-3HQ)
Best wishes until the next update.
Mid-January is upon us and PRS is off to a roaring start! Given the building tensions in the Middle East and the continuing conflict in Ukraine, it's not surprising that political risk is on the minds of many. Our clients are asking for data, analyses, and especially forecasts. The latter seems particularly apt as a number of new clients have come to us with concerns about supply chain security. Our scenarios and quasi-Type II forecasts are being read at a quickening pace. Having almost 45 years of geopolitical risk data is obviously helpful!
As I mentioned last year, we were in Montreal at the end of 2023. A range of activities were planned, and I must say every time I return to that city I feel a sense of rejuvenation. I think there's something about the civility of Canadian culture (people actually have conversations with each other), the bilingual and bicultural nature of the city and it's history that make it special to me.
There are some plans in the works to spend a little more time in the Laurentians - a place that was my spring break 'home' for many years when I was younger. I began skiing at three (my Dad was a professional football player in his 20s and, as a sports freak, he was always hauling us to the slopes to enjoy the softer snow, the warming sun, and the French Canadian jest for life). I recall fondly the heavy evening snow storms, the chalet fireplace roaring, and watching the Canadiens on a small black and white TV. And after a break of some years (living in Vancouver for over a decade spoils one when it comes to skiing) the plan to return to the sport is now a priority! Rossignol all the way!
Clients and friends should note that PRS' popular Researchers’ Dataset (RDS) series – containing updates from 2023 – is now available. The RDS series – derived from our ICRG data – continues to yield unique insights in a range of topics that explore the impact of political risk on asset prices, inflation and monetary policy, the economic costs of war, youth unemployment and political stability, and much more. Contact us at custserv@prsgroup.com to acquire about acquisition of the RDS updates.
On this score, we continue to receive considerable demand for Table 3Ba of the RDS, which offers a more granular look at the political risk components of the ICRG, supported by 20 years of monthly data. The series works as an excellent complement to the other data bundles announced this year affecting ESG, corruption, and internal/external conflict. Scores of academic studies have been conducted using these series, providing unique insights in asset volatility, government responses to the pandemic, and many more.
All the best for 2024!
The New Year is upon us and all sorts of exciting events are coloring PRS' agenda over the next couple of months.
First, my researchers continue to send me academic scholarship on a daily basis that uses our ICRG data to shed light on various political and economic phenomena.
One recent piece looked at the empirical connection between youth unemployment and political stability in select African countries.
What was found?
Youth unemployment and Inflation and ethnic tensions have a positive relationship with the political instability.2/ When the youth unemployment rate increases by 1%, it leads to political instability by 16%.3/ a 1% increase in government stability decreases political instability by an average of 0.19%There’s quite a lot more in this study, so if time permits have a look at this piece and especially the thorough literature review contained therein.(https://lnkd.in/g72MVEgX)
Also, given that some Fed officials have suggested that rates could remain high 'for some time,' another piece from the Working Paper series of Bank for International Settlements – BIS was instructive.
Using our ICRG financial risk ratings as a proxy for debt sustainability concerns, this study looked at the impact of public debt surprises on inflationexpectations in developed and emerging market economies. It was found that debt surprises raise long term inflation expectations in emerging markets in apersistent way but not in developed ones. The effects are especially pronounced when debt dollarization is already high. By contrast, debt surprises have only modest effects in countries with inflation targeting regimes. https://lnkd.in/eNdsXnw4
We are also continuing to work with one of the world's largest tech companies to develop an AI platform that will serve as an indispensable aid to the raw data that is offered through a subscription to the ICRG and our Country Reports and Economic Forecasts. Offering up such deliverables as the ability to bring forward our risk ratings by about a year with a 85% confidence rate, to a natural language application that will marry the empirical findings of over 40 years of data to simple or complex queries.
Exciting times at PRS!
The fall months are finally here and the weather in much of North America - including the US South, where PRS is now based - as finally cooled off and everything is in full bloom, from the sweetgrass to Crepe myrtle to the bottlebrush bushes! It's a great time to be cycling longer distances and fully returning to work after the extremely warm summer months.
Speaking of returning to work, I was able to attend a very informative conference in Toronto (I miss that city so much sometimes) sponsored by IBM, which dealt with new forms of data and the challenges facing companies as new waves come over firms. I was able to speak with some of the keynote speakers about our ICRG data, how it's used in the AI context, and what paths might we follow as the technology becomes increasingly sophisticated. Needless to say, I'm extremely happy to say that PRS has entered into early-stage discussions with IBM to transform and embed our data into various generative applications. Stay tuned for more on this development.
I'll be attending various conferences and client meetings in the US and in Europe over the balance of the year, from a gathering of anti-corruption groups in Atlanta in December, to Rome in November, and Montreal as 2023 comes to a close. A return trip to Italy is in the works in the spring of 2024, from Firenze to Capri.
The last couple of months has seen PRS welcome back some returning clients, from Dartmouth and Princeton, to France's equivalent of the FDA, several international mining companies, and investment houses from Pakistan to Singapore.
Finally, the ICRG data continues to leave others in its wake as the number of scholarly entries using our data continues at a rapid pace. Some of the literature uses our data to provide direction on equity and fixed income prices. Other studies offer actionable insights into currency movements, inflation targeting and capital flight. Other studies consider whether sovereign debt held by private lenders is correlated with a higher probability of a fiscal crisis. Below are some links to the research.
(https://lnkd.in/dfhD6WQU)(https://lnkd.in/gxz4rKH7)(https://lnkd.in/gdRgnrwG)(https://lnkd.in/gmPnf9S8)
I hope everyone is doing well and that the fall months remain productive and positive!
With summer firmly planted in the Lowcountry (and the heat and humidity becoming close to unbearable), it's a time for a little solitude and relaxation before the fall is upon us along with the final quarter of 2023.
In April I was happy to take my daughter to Rome for Easter. The trip was a complement of sorts to her trip with me to Paris during Thanksgiving, where she attended a very enjoyable dinner with some professional associates from the SKEMA business school in Paris, and later had a private equestrian ride on the grounds of Versailles. In Rome I made sure she saw all that was required to be seen, although she really enjoyed simply having something to eat and relaxing by the Tiber. There are a couple of very nice areas across the Ponte Palatino as one enters the Trastevere area to do these sorts of things.
In late May I was ale to fulfill one of my 'bucket-list' items and participate in the L'Eroica vintage cycling event in Montalcino. I don't think I could ever train properly for those hills (given where I spend most of my time) but the event was spectacular and the weather stunning (26C and nothing but sunshine). After the event, I drove north to Florence and spent a week at a super hotel on the banks of the Arno, and made daily outings to Florence on a bicycle. I was in Florence some time ago and didn't have many opportunities to see some of the work of my fav Leo and Michelangelo in the Uffizi and Accademia. So off I went and to these places, and also spent some time in the Boboli Gardens.
I'll be heading to Canada next week to visit family and some friends. I suspect some cycling will be in order as the area of my stay is in the vineyards of the Niagara region.
As it relates to PRS, we have a new video series coming by September that will showcase all the new features of the data. There's a theme that runs through these videos and I suspect that will do something considerable to cement the firm's reputation as the world's leading quant-driven geopolitical risk rating and forecasting group.
With hopes dwindling of rate cuts later this year in the US – following unexpected hikes from central banks in Canada and Australia – attention is recentered on the effect on some emerging markets’ currencies and debt repayments.
But what complicates the picture? For example, what is the effect of political uncertainty on sovereign default and interest rate spreads in emerging markets?
This paper from the working paper series of the Bank of Mexico develops a quantitative model of sovereign debt and default under political uncertainty in a small open economy. Consistent with empirical evidence – and using our ICRG data – the quantitative analysis shows that higher levels of political uncertainty significantly raise the default frequency and both the level and volatility of the spreads. When parties borrow from international credit markets, the presence of political uncertainty induces a short-sight behavior in politicians.
Have a quick look when time permits:
https://www.banxico.org.mx/publications-and-press/banco-de-mexico-working-papers/%7B01A3DA6B-F6E7-771C-BA85-251B02923801%7D.pdf
One of the more rewarding things about running PRS and providing a widely used set of indicators on political risk is that these data consistently appear in the top scholarly and trade journals.
This time we have entries in the Journal of Financial and Quantitative Analysis; the EuroMed Journal of Business; and the International Journal of Economics and Financial Studies.
So when time permits, have a look at how our political risk data helps draw the connection between global shocks and currency investment strategies, as well as with stock returns and volatility, and the movement of emerging market equities and bonds.
(https://dergipark.org.tr/tr/pub/ijefs/issue/51660/670635)
The weather here in the Lowcountry is clearly displaying signs of spring, with temperatures now consistently in the low to upper 20s. This is always my favorite time of the year, since it ushers in the summer months and brings life to a variety of plant life. Renewal is a constant theme in life.
In any case, I'll be speaking soon with a group of international distillers, including representatives from the likes of Kendall Jackson and Pernod Ricard. I'll be providing a slightly different and data driven slant on some issues of the day, including the growth prospects in Europe, US tensions with China, sovereign debt issues, and some currencies to watch in relation to the USD. I really enjoy speaking with credit professionals since they are intimately involved with the day-to-day issues of international business and have an acute understanding of selling into some very different markets.
Later in March, I'll be at Harvard University, speaking to some students of Dr Peter Marber - my co-author and co-editor of our book, Quid Periculum: Managing and Measuring Political Risk in the Age of Uncertainty (contact PRS at custserv@prsgroup.com for a copy). Peter and I share a great deal in common when it comes to intellectual influences and I always enjoy speaking with his emerging markets class.
Finally, I've decided to put on hold my original plans to fly fish in Ireland for a trip to Rome, the Amalfi Coast, and Tuscany in April. Someone close to me has to see some of the world's most historic places and Italy - and most things Italian, from cars, to music, to instruments - have had a particular hold on me since I first visited the country some 20 years ago. As you know, the following month I will in a cycle race in Montalcino, so that event I wait for eagerly.
PRS recently expanded its trading activities to include more international fixed income securities, as yields in the US and elsewhere have become increasingly attractive and now compare competitively in many ways with equities. This is a welcome event as the past 15 years have been extraordinary in terms of asset values on the back of cheap money.
My flagship data series, the International Country Risk Guide (ICRG), is always at the forefront of the geopolitical data used by academics and practitioners alike.
As such, we have found a couple of new studies using our data in part to consider the relationship between debt workouts and economic growth, courtesy of the IMF's Working Paper series and a similar line of work by the Bank of Italy - both long-time clients of mine. Thanks to both.
What are some of the implications of sovereign defaults and debt workouts to economic growth and fiscal crises?
1/ Defaults are correlated with contraction of short-term output growth. But those countries with a higher proportion of official debt restructured have experienced higher growth in the long run.
2/ A larger share of debt held by the nonofficial sector is associated with a higher probability of a debtor country running into a fiscal crisis, and that the magnitude of the negative impact is larger at higher debt levels. Moreover, countries with a larger share of debt held by nonresidents are more likely to run into a fiscal crisis, and the magnitude of the estimated positive impact is larger at higher debt levels.
Our data has long been a favorite of the global investor class - and has been so since the 1980s. Our clients and friends will know that our ICRG data has been consistently and independently back tested since the early 1990s, showing numerous correlations with asset classes and a range of political and economic phenomena.
As such, JP Morgan has recently adopted our data as part of the company's efforts at refining its approach to ESG investing (to put it simply), and former members of the 'world's premier asset management' firm have sought it wise to use our entire historical series to find those areas where the forward looking nature of our risk forecasts uncovers statistical anomalies in an effort to capture that all important alpha.
Meanwhile, I will be speaking to members of the Finance, credit and international business association (FCIB) about some of the risks facing the global economy at the moment. I will also deliver a lecture to students at the Graziadio Business School at Pepperdine University. One of the best parts of working in this field is speaking to those with a business and academic interest in geopolitical risk and, in so doing, offering some insights based on almost three decades in the field and hopefully encouraging a new generation of political risk analysts to continue their professional goals.
On a personal note, in April I will be in Ireland, fulfilling one of my so-called bucket list items: fly fishing on the emerald isle. The next month will see me joining a well-known French jazz guitarist (and harmony teacher) in New York, exploring the depths of one of my guitar heroes: Django Reinhardt. The month will close with a 128km cycling race in Montalcino, Italy, on a vintage Bianchi Specialissima. The white gravel roads, Chianti, good friends, and hopefully warm weather beckon me.
Our International Country Risk Guide continues to be the most widely used geopolitical risk data series in the field. Not driven by attention grabbing news headlines, the 40+ series continues to yield timely empirical results.
For example, with new fears of a recession affecting a third of the global economy, and recent suggestions of a ‘shallow but long’ recession in the US, all eyes are fixed on the timing of the Fed’s move to ease in 2023.The Fed remains steadfast in its commitment to reduce employment/demand-driven inflation in the US but the markets are pricing in cuts this year.
Assuming the latter – when it happens – is significant for investors and firms in emerging markets.
So, what’s the connection between US monetary policy shocks, net capital flows, and emerging market equity and bond returns?
This interesting piece - which uses our ICRG data as one of the various country specific ‘pull’ factors - provides some good insights intothese relationships, especially in terms of sequencing and flow volumes.
Additionally, a recent IMF Working Paper revisited the relationship equity returns and inflation, specifically under different monetary policy regimes.
Using our ICRG financial risk metrics as part of the panel data set covering 70+ countries over from 1980 to 2015, cf this link for the general conclusions.
The study’s findings provide some insight into possible sequencing of developed and emerging market exposures.
Simply the best data around.
The late fall and early winter months have been particularly productive and rewarding. I spent some time in Paris - one of my favorite cities - meeting with clients, investment partners, and several rather esteemed professors from the SKEMA business school. The dinner was only bested by the conversation which trailed on into the late evening. Thanks to Roldolphe and Philippe and the rest for being such accommodating hosts.
The trip was made complete with an equestrian ride for my daughter - who accompanied me on the trip - as she spent several hours trotting around the grounds of Versailles with her guide, Jean Baptiste. The lunch on the grass of the palace was especially enjoyable.
After several years of being quite restricted in our mobility, the beginning of December witnessed my first major conference since leaving the G20 in Riyadh in February of 2020. The International Conference on corruption in DC was incredibly informative, and just seeing friends and clients in person after so much time was difficult to described. As much as I like solitude I think the human condition is social. We thrive in social settings, both intellectually and emotionally. Despite the waves of infections currently sweeping through China, I can only pray that this dreaded virus and all its variants will fade into the distant memory.
December was capped with some time off in Naples, Florida - a retreat of sorts that I've had since the mid 2000s. It's always nice to feel some warmer temperatures, focus a little on year end activities, cycle, visit the gym in the morning, and meet up with friends.
Christopher was pleased to host a 40mn podcast with Professor Brandon Parsons of Pepperdine University, just before PRS' Charleston office was called on by Hurricane Ian. Professor Parsons presented some of his research on the connection between corporate taxation and income/wealth disparities, as well as the effect of corruption on economic growth. The full interview will be available soon on PRS' YouTube page and on Linkedin and Twitter.
September closed a busy note as the data for the International Country Risk Guide (ICRG) was published, and PRS was about to send its annual corruption data to Transparency International, the Berlin-based watchdog. Also, some very interesting empirical studies using the ICRG data were brought to our attention, with one effort documenting the various ways 'channels of political risk' help create inflationary pressures. Have a look at our Linkedin in page for more information. And finally, Christopher is looking forward to a number of meetings this week with one of China's sovereign wealth fund, JP Morgan's Indices office in London, and professors from the University of Pennsylvania.
An annual event prior to the pandemic, in September Christopher will welcome back to Charleston representatives of South Korea's anti corruption agency. Always an engaging and thoughtful discussion, Christopher is looking forward to discussing further the group's initiatives over the past year or so in the welcoming environment of Charleston, South Carolina.
Christopher and representatives of the central bank of the Philippines are in the process of curating a list of meetings and related events ahead of a planned visit to the country in November. The visit comes in the wake of a very pleasant gathering in Washington earlier this year to discuss several issues ahead of the general election.
Christopher has accepted two invitations to Riyadh this year to participate in ministerial meetings involving the Anti-Corruption Authorities of the Gulf Cooperation Council (GCC) and the Organization of Islamic Cooperation (OIC). Other participants include representatives from the World Bank, the IMF, and the OECD.
Christopher met with Marat Akhmetzhanov, Chairman of Kazakhstan’s Anti-Corruption Agency, and his staff to discuss several of the ongoing initiatives in light of the events of January in the country. Informative to say the least, the country sees the importance of SME development as a means of addressing socio-economic disparities.
Do natural resources jeopardize a country’s fiscal sustainability even before ‘the first drop of oil is pumped?’ Using our ICRG data on corruption, and several other metrics as a proxy for overall political stability, this interesting piece from the IMF Working Paper series finds that giant discoveries, mostly of oil and gas, lead to permanently higher government debt and, eventually, debt distress episodes, especially in countries with weaker political institutions and governance.
Using elements of the ICRG risk data (inter alia), a recent study published in the Bank of Italy’s Occasional Paper series presents some noteworthy findings on the impact of the IMF’s resources on sovereign spreads.
Given the spread of the omicron virus, an interesting study was published in Globalization and Health, in which our ICRG risk metrics were instructive in explaining why globalized countries, with high levels of government effectiveness, were relatively more cautious in implementing travel restrictions than those with lower levels of public efficacy.
PRS releases a new geopolitical data series as part of the firm’s popular Researchers’ Datasets (RDS). This new series offers the annual averages (beginning in 2001) of the 15-political risk subcomponents of the 140 countries from the ICRG. This most granular approach to overall geopolitical risk assessment delivers a thoroughly vetted, quant-based look at the building blocks of government stability, the bases for a country’s socioeconomic health; the key risks facing business and investment, from contract repudiation to transfer and payment delays; to the increasingly important role that local and international politics plays in relation to forms of internal dissent (strike activity, terrorism, civil war) and to global relations (cross border conflict, sanctions).
