We at GeoQuant customized our baseline Political Risk model to better capture a country’s political/social capacity to respond to a health shock like the COVID-19 pandemic. The resulting COVID-19 Political Risk model overweights governance factors like State Capacity and Institutional Support Risk – which measure the strength of state institutions to enact and carry out policies and the government’s control of said institutions, respectively – as well as social factors like Health Risk (for obvious reasons) and Social Polarization Risk (an inverse measure of social cohesion).
The model does not include country-level epidemiological factors; it is designed to capture relevant political/social factors only. To gauge countries’ relative political/social capacity to respond to COVID-19, we compare overall risk scores across the 10 countries in our system with the highest number of confirmed cases. We also include Taiwan given its proximity to China and its (thus far) notably low number of cases.
Currently, Iran has the highest level of COVID-19 Political Risk in the country set, followed by China, where the pandemic began. Strikingly, the United States ranks third, ahead of Italy, Spain, South Korea, and France – all of which currently have more cases than the U.S. Notably, Japan – which has managed to keep an early bout of infections relatively low – is the lowest risk country in our system.
Custom COVID-19 Political Risk Model  | Forecasting Country-Level COVID-19 Risk in Q2
Comparing each country’s daily level of COVID-19 Political Risk against its baseline Political Risk score in our system captures the relative increase in country risk generated by the customized COVID-19 risk model. Results for key countries are summarized in the figure below, which shows the change in average daily risk scores for two time periods: (i) the recent past, 1 Dec. 2019 through 12 March 2020 (i.e. 1-month prior to the commonly recognized start of the virus’s spread in Wuhan and lasting through today); and (ii) the near future: today through the end of Q2/2020. Higher values for the second time period (red bars) indicate sharper divergence from our baseline risk model in Q2/2020, implying an increasing impact of health-related risks relative to Q1/2020.
Country-specific insights are as follows:
- China and the U.S. – the two largest global economies – show the largest increases in average daily COVID-19 Political Risk relative to our baseline Political Risk indicator. This is true for both time periods we examine. As such, ongoing investor concerns about the U.S. governments’ ability to respond to the pandemic are unlikely to abate soon.
- Among the countries with higher infection rates, Japan and South Korea stand out as having relatively low COVID-19 Political Risk, both absolutely and versus the baseline risk score. This suggests that ongoing government efforts to contain the pandemic will continue to be relatively effective in both countries.
- By contrast, higher Italian COVID-19 Political Risk is not projected to decrease relative to baseline Political Risk, a negative sign for political/social capacity to stem the virus’s spread despite the government’s recent quarantine expansion and mandatory closure of all restaurants/bars and most retail stores.
- Germany stands out as the EU country with the lowest level of COVID-19 Political Risk and a place where we do not anticipate growing divergence with baseline Political Risk in the near future.
- The Taiwanese government’s success in containing the risk of COVID-19 early and effectively looks set to continue.
- Iran will continue to struggle to respond to the COVID-19 shock, and is narrowly beyond only the U.S. and China in terms of the expected increase in Risk in Q2/2020 relative to Q1.
Full Insight available for clients here.
Transatlantic Relations In the Time of COVID-19 | Trends in U.S.-Europe Contingent Health Risk
In light of the recently announced U.S. 30-day travel ban from Europe (sans UK), we use our new Contingent Health Risk feature to track bilateral Health Risk between the U.S. and the European countries in our system. U.S. Contingent Health Risk vis-à-vis European countries are rising nearly across the board with risk concentrated among major western European trading partners. In particular, U.S-Italy Contingent Health Risk has spiked to new highs as weak COVID-19 policy responses highlight both countries’ continuing poor management of the pandemic. Italy is well into a brutal coronavirus epidemic and is the only European country with which U.S. Contingent Health Risk is forecast to fall. In contrast, rising Contingent Health Risks with Spain, Germany, France, Belgium and Poland reflects those countries facing Italy’s path ahead, with the level of risk reflected in their rankings in the figure below – higher scores indicate higher risk. U.S.-UK Contingent Health Risk has long been elevated with the current health crisis sustaining that concern (recall that the UK has been excluded from the U.S. travel ban).
Full Insight available for clients here.
Market Movements | GDP-Weighted Global Health Risk
To assess the duration of this week’s COVID-related market uncertainty, we constructed a GDP-weighted measure of our country-specific Health Risk indicators, and subsequently computed average health risk globally, as well as for G20 and EM country subsets. Per the first panel in the figure below, we forecast that global GDP-weighted Health Risk will increase through late March, but will return to pre-COVID outbreak levels (i.e. risk levels that prevailed one month prior to the closure of the Huanan Seafood Wholesale Market on 1 January 2020) in late April/early May. Per the second and third panels in the figure, our data suggests similar timing for a reversion of Health Risk across both G20 and EM market sub-groups. The parallel trends speak to the inter-related nature of the outbreak across both the G20 and EMs.
To the extent that uncertainty surrounding COVID – and governments’ ability to manage the outbreak – have contributed to the market instability of the past several weeks, our data currently suggests that the impact of these dynamics will begin to dissipate around late April/early May. Though clearly capturing only part of the story (particularly given this week’s oil market dynamics and the rebound in U.S. yields over the past several days), the figure below – which looks at global gdp-weighted Health Risk against U.S. 10-year yields – is illustrative in this regard.
We note that while average global risk levels are forecast to decline, the effect will be uneven at the country-level, with several of the hardest hit countries to date (e.g. Italy and Iran) continuing to experience rising Health Risk through at least 1H/2020. Full Insight available for clients here.
The Month Ahead | Political Risk
The figure below provides our 50-country forecast of top-line Political Risk for the month ahead (today through 10 April). Red (green) bubbles indicate increasing (decreasing risk). Full trend lines available on the app. Custom insights available for clients.
Forward-looking updates from GeoQuant’s high-frequency political risk intelligence platform. *Originally distributed 3.13.20