Political risk is one that affects the economic interests of companies. This is a consequence of changes or the lack of political stability in a country or region. From this point of view, any place in the world presents a greater or lesser political risk.
Differences between micro risk and political macro risk for RV rental business
When assessing and weighing the consequences of possible political disruption, it is convenient to differentiate between political macro-risk and micro-risk.
Political macro-risk refers to those changes that affect all companies and commercial and industrial networks that operate in a given country. This may be due, for example, to widespread expropriations of foreign companies or to armed conflicts.
Political micro-risk, however, comprises those decisions or events that harm a specific company such as RV rental industry. Corruption or making specific political decisions are some typical examples.
Political risk depending on the scope of the investment
On the other hand, the level of activity and involvement in the regional economic framework that a company assumes also determines the degree of political risk that is being assumed. In this sense, these 3 categories are usually differentiated:
- Trade political risk
- Political risk on international technology and intellectual property licenses
- The political risk from direct investment abroad
The risk of commercial exchange is the one that usually supposes more moderate economic damage. Investment in foreign territory is the one that can have the greatest impact on the balance sheet of a company.
How does political risk affect companies?
Political risk has repercussions on very varied areas of trade and the international economic activity of companies.
Supply chain
The absence of political stability can also affect the supply chain. Currently, companies are supplied with components and raw materials from multiple countries and whose transport may involve crossing several borders. Any event or political decision that interferes with the flow of the supply chain can seriously affect an international business. For example, the war between Ukraine and Russia has affected hundreds of companies directly or indirectly.
Hyperinflation and currency fluctuations
The volatility in the exchange rate of the currency or currency used in a certain country also directly affects the income statement of a company. Fluctuations can, however, be due to many reasons.
In some cases, political corruption creates a chain reaction in the stock markets causing the local currency to devalue against that used in the country of the foreign company.
On other occasions, excessive inflation and the lack of control by the regulatory entities of the local financial market make it impossible to make a reliable calculation of the results of a given financial year, after applying the corresponding exchange rate.