In 2018, emerging markets made headlines as foreign investors pulled back from heavily indebted countries like Turkey, Argentina and South Africa. While 2019 is unlikely to experience a full-blown debt crisis, we believe political and trade credit risk will remain in the spotlight in Argentina and Turkey, as well as other key markets, driving increased demand for specialist trade credit insurance. US-China tensions may also create trade distortions and put US companies operating in China at risk.

Over the last six months, emerging-market assets have suffered the longest sell-off since the 2008 financial crisis, and for many of these countries, the scene is set for a challenging year in 2019. A number of countries are vulnerable to capital outflows, including Pakistan and some Sub Saharan African countries like Zambia and South Africa.

Short term, the outflow of foreign investment will create increased credit risk for investors and companies with interests in certain emerging markets.

Longer term, there could be secondary risks, such as civil unrest or government action against foreign investors. Countries facing a potential debt crisis might seek to take a larger share of foreign company revenues, for example by renegotiating concessions and licences, or raising taxes. Attempts might also be made to stem the flow of hard currency leaving the country – which could limit companies’ abilities to repatriate profits or lead to non-payment of foreign suppliers.

However, our predictions for these economies are not all doom and gloom. Many emerging markets have growing populations and growth potential that supports foreign investment, such as in energy, utilities, renewables, transport and telecommunications. Emerging markets are also in much better shape than they were during the 1980s and 1990s, when Latin America and Asia were last hit by major debt crises.

Elsewhere, an escalating trade dispute between the US and China also adds volatility to all political risks. The tit-for-tat tariff increases could dent world trade, and longer term might lead to targeted action against US companies operating in China.

The net result of these trends is likely to be increased demand for trade credit and political risk insurance in what may be a more volatile claims environment across emerging markets.

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