The need for and importance of political risk cover is increasing given current events in global markets. Increasingly, we are witnessing the impact of climate change, conflict and regional tensions. The situation is further complicated by rising tariffs that create barriers to exports, the unpredictability of autocratic regimes and the practices of countries protecting their markets. All this disrupts supply chains and creates barriers to trade.
This is the topic that we address in the last part of this year’s series I Want to be an Exporter, which HN prepares in cooperation with Eximbank.
A key tool
Many investors still have little knowledge of political risk insurance (PRI) coverage options and their benefits. “At a relatively small price for insurance, up to 95 per cent of the value of an investment is covered in this way. Yet PRI is a key risk mitigation tool for investors, especially in developing countries and low-income countries,” says an information paper prepared by Eximbank for investors.
The PRI protects investments against a variety of risks – including expropriation, political unrest, the inability to transfer currency, or treaty violations by states. The Eximbank therefore believes that this instrument should be a natural part of insurance, particularly for investments in countries with higher political risk.
This service is only offered by a small number of institutions. Up to 78 per cent of all PRIs are provided by export credit agencies, including the Slovak Eximbanka. It has the know-how and tools that enable Slovak exporters and investors to enter new markets with a higher degree of certainty and competitiveness.
An overview of key territories and providers of this service is provided by the study Derisking investment for the Sustainable Development Goals, The role of political risk insurance, to which Eximbank also contributed. It maps the most important investment risks in developing countries dependent on foreign investment. It also highlights the importance of political risk insurance in helping to mobilise finance to low-income countries with high risk coverage for foreign investors.
Asia dominates
In addition to export credit agencies, other private, public or multilateral financial institutions also provide PRIs. The world’s most advanced G7 economies have the most experience in providing it.
In recent years, Asian export credit agencies have dominated the top spots, led by China’s Sinosure, which has provided nearly half of all PRIs. It has the strongest coverage in the African region. It is followed by Japan’s NEXI.
In addition to the Chinese and Japanese agencies, South Korea’s KSURE is also active. It is the Asian agencies that have provided more than half of the total public PRIs in the world. Other major players in this field include Italy’s SACE, Germany’s Investment Guarantee and the USDFC.
Asian countries are also the main recipients of PRIs, with as many as 12 out of 20 recipients coming from Asia. This is followed by Africa. In the least developed economies, PRIs account for up to 28 percent of all FDI, reflecting the greater reliance on political risk insurance in countries with higher perceived risk.
In Africa, the PRI is equivalent to 18 per cent of FDI inflows, declaring the high share of LDCs on the continent. In comparison, the ratio of PRI to FDI inflows was seven per cent in Asia and Oceania and six per cent in Latin America and the Caribbean.
150 billion worth of projects
The study also presents other key findings. Between 2018 and 2022, for example, more than $150 billion worth of projects were insured through PRI. The main sectors are manufacturing, infrastructure, energy and mineral extraction. Less than four per cent of all investment went into renewables.
The qualitative analysis is based on interviews held at the United Nations Conference on Trade and Development (UNCTAD) in late 2024. They provide valuable insights into the perspectives and experiences of key stakeholders on PRIs. The aim was to examine the barriers and opportunities in investing in developing countries and recent developments in the mobilization of finance.
The series I Want to be an Exporter is prepared by HN in cooperation with Eximbanka.
Many investors still have little knowledge of political risk coverage options.
Author Pavel Novotný
The series I Want to be an Exporter is prepared by HN in cooperation with Eximbanka.