In partnership with Continuum Economics


High level themes

The Aon 2021 Political Risk Map captures changing risks for businesses and countries across emerging and frontier markets. Looking ahead, we have identified three major drivers of risk, which will determine the outlook for emerging market (EM) and frontier market (FM) investors in the next year.

The first two drivers will be particularly strong in the coming year, as they will be the major determinants of COVID-19 recovery experience in EMs and FMs. Indeed, whether individual EMs and FMs benefit from economic recovery in 2021/22 is dependent on the effectiveness of COVID-19 vaccine distribution and on the extent to which inflation short-circuits any recovery by squeezing real disposable income growth.


The first driver of COVID-19 vaccine distribution will be challenging in EMs and FMs for both financial and practical reasons. Early vaccination campaigns will partly depend on countries’ own financial resources due to the slow roll-out of the COVAX initiative. Outside the context of COVAX, the West has been reluctant to send vaccines to EMs before ensuring coverage of its own populations. However, Russia and China have embraced the opportunity of vaccine diplomacy to promote their political and economic interests in EMs and FMs. Even then, once financing constraints are addressed, the difficulties in reaching remote rural populations in EMs and FMs cannot be understated and remain a central risk in the year ahead.


The second driver is the resumption of EM inflation. While it could be argued that inflation is an inevitable by-product of economic recovery, our long-standing view is that it threatens to torpedo the incipient recovery in EMs by squashing real disposable incomes. Oil price rises are a boon for oil exporters among EMs, but the core of the recent jump in EM inflation lies in food prices. Because food prices represent a much larger share of the consumer basket in EMs, their dynamics drive the outlook for EM purchasing power. Even if we assume recent rises in oil/food prices are temporary, they have already succeeded in dislodging inflation expectations in many EMs. Only EM central banks with solid credibility will be in a position to navigate the EM inflation risk in the next year.


The third driver is the ability of EMs/FMs to meet their commitments to a green recovery in the midst of a global pandemic. While EMs/FMs suffer the most from climate change and will gain from mitigation long-term, EM governments are faced with the short-term political pressure of rebuilding faster in the old polluting ways instead of rebuilding better greener, and there is a significant risk that they will choose the former. Furthermore, political pressures could arise from perceptions of a trade-off between addressing the rise in economic inequality prompted by COVID-19 and the costs of greening the recovery.

Country risk changes