What Is Political Risk?
Political risk is the potential for financial, market, or personnel losses that occur due to political decisions or disruptions. Political risk is also known as "geopolitical risk."
Who Is Affected by Political Risk?
Political risks are faced equally by investors in international businesses and investment fund portfolios. These are typically part of the estimation and disclosure of risk factors (usually found in a company or portfolio's prospectus).
Although political risk is extremely difficult to quantify, companies and investors must examine its potential by closely examining the location's history, political institutions, and governmental forces.
Political Risk Examples
Besides market-based causes, businesses can be affected by a plethora of political decisions or changes that can affect conditions and profitability.
The following are examples of political risk actions: decisions made by governmental leaders regarding taxes, currency valuation, trade tariffs/barriers, investment, wage levels, labor laws, environmental regulations, and development priorities.
Non-Economic Political Risk Factors
Other examples of political risk include disruptions such as terrorism, riots, coups, civil wars, international wars, and even elections that may change the ruling government. These can dramatically affect businesses' ability to operate.
Why Is Political Risk Important?
Just like any financial, physical, or market risk, political risk has the potential to directly affect the operations and profitability of a business.
The impact may also be considered long-term due to the potential for further events and changes over time.