Resilience will be particularly important for countries most exposed to the impacts of climate change, which will result in more frequent and severe weather events. This is according to the latest research from Verisk Maplecroft, which flags climate change as the most important cross-border risk affecting the long-term outlook for global investment. More than 50% of countries are categorised as ‘extreme’ or ‘high risk’ in the GRRA’s Climate Change Exposure Index, with the key Asian economies of Bangladesh, Hong Kong, Japan, Philippines, Cambodia, Thailand, Vietnam and India among the highest risk.

However, the economies of Japan and Hong Kong are rated ‘low risk’ and among the best performing in the GRRA’s Global Risks Resilience Index, ranking 184th and 191st respectively. Conversely, Verisk Maplecroft identifies Bangladesh, Cambodia, India, the Philippines and Vietnam as ‘high risk’ countries where vulnerabilities to a global risk event should be taken into account in business continuity planning. In particular, ‘extreme risk’ levels of corruption and high levels of poverty will hamper these countries’ ability to respond to global risks. However, India’s performance for rule or law, which is better than that of its neighbours, places it in a notably better position, something which has already been demonstrated in the country’s response to natural disasters.

The GRRA also provides a barometer for likely flashpoints of risk by assessing countries’ dependence on other countries for their food, energy and water supplies. As temperatures rise and rainfall patterns change as a result of climate change, the likelihood of tension between countries as they compete for water resources can be viewed as potentially volatile.

Uzbekistan, which is 3rd highest risk in Verisk Maplecroft’s Water Import Security Index, has previously raised the spectre of armed conflict over the threat to the country’s essential cotton industry by the construction of the Rogun Dam in Tajikistan, while also opposing a similar project in Kyrgyzstan. Other countries that are similarly reliant on cross-border water supplies include Niger (1st), Botswana, Pakistan, Bangladesh, Cambodia and Egypt.

“Companies operating in countries engaged in resource disputes face the potential for trade barriers, such as increased tariffs, obstruction to transport networks and heightened diplomatic tensions, all of which can contribute to the chances for cross-border incidents to flare up,” adds Ingham.

Political risk

Verisk’s global study identified the economies of nine countries, including Pakistan, Kenya, Cameroon, Egypt and Turkey, as facing an ‘extreme risk’ from cross-border security threats arising from their proximity to conflicts and countries which are exporting terrorism.

The Global Risks and Resilience Atlas (GRRA), which assesses the prevalence of 14 cross-border ‘global risks’ and 8 resilience factors in 198 countries, helps investors identify the economies that are most vulnerable to external threats from global demand shocks, regional insecurity, environmental disasters, resource insecurity and pandemics.

According to Verisk Maplecroft, regional security risks are the most volatile factor, with spill-over violence from conflicts and terrorist attacks rapidly undermining the operating environment for businesses and investor confidence. These risks are especially salient for the key growth markets and sourcing hubs of Pakistan (ranked 2nd most at risk in the Regional Security Risk Index), Kenya, Cameroon, Egypt and Turkey, all of which are rated as ‘extreme risk.’ Lebanon, Niger Iran and Central African Republic complete the highest risk category.

More than 46% of the reported cross border attacks that took place in the February 2014 to February 2015 reporting period for the Terrorism Risk (international exposure) Index took place in countries within the Middle East and North Africa. The region is also host to more than 40% of the countries categorised as ‘extreme’ or ‘high risk’ in the Regional Security Risk Index, mostly due to ongoing conflicts and terrorism emanating from Iraq, Syria, Libya and most recently Yemen.

Elsewhere, East Africa is host to almost 20% of the countries categorised as ‘extreme’ or ‘high risk’ in the Regional Security Risk Index. Kenya (3) is the region’s only ‘extreme risk’ country, driven by the risks emanating from Somalia. There were 13 reported cross-border terrorist attacks perpetrated by Al-Shabaab in Kenyan territory in the reporting period, resulting in 78 people being killed. Terrorism is continuing to undermine demand in the key tourism sector: according to the Kenya Coast Tourist Association, as of March 2015 30,000 people have lost their jobs, while 25 hotels have been forced to close.

“Investors assessing a country’s long-term risk outlook need to understand both its exposure and resilience to cross-border shocks,” states principal analyst at Verisk Maplecroft, Charlotte Ingham. “The building blocks of resilience are good governance, strong institutions and effective infrastructure – these enable a country to put preventative programmes in place and bounce back quickly from a significant ‘global risk’ event.”

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