One of the most striking changes on the international landscape as a result of the financial crisis has been an increase in the impact of government on business performance. And business has recognised this re-emergence of political risk.

EY’s last bi-annual global Capital Confidence Barometer (CCB), a survey of senior executives from large companies around the world, revealed that 38% of business leaders saw increased political instability as the major risk affecting their investment decisions – the highest economic risk to investment identified in the survey.

In place of fear

Political risk in developed economies is manifesting itself in heightened government intervention. More onerous regulation in the financial sector is one example, and there are increasing attempts to influence conduct, such as the linking of corporate taxation and eligibility to bid for public contracts.

In the UK, the focus of business on corporate governance and regulation increased by 25% and 20% respectively in the most recent CCB, compared with the one six months prior. And the focus on growth and investment dropped. Clearly, political risk distracts businesses away from expansion planning and transactions.

The scale of the change is significant and should come as little surprise given public sentiment towards the banking sector, increased pressure from issue groups across sectors and several high-profile fraud allegations such as those concerning Libor and Forex trading. Political risk on a global scale goes beyond measures to regulate and influence. While the world economy was expanding, structural economic weaknesses were either masked or were simply not issues that investors were unduly worried about. As the world economy emerges from the financial crisis, growth will be lower and harder to achieve than in the pre-crisis period. Incomes will be squeezed. This new paradigm is likely to encourage governments to intervene in the economy and increase the political risk for businesses.

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