Political Risk-Investment Risk

Most people reading this are unlikely to be too enamoured of politics. It has become a globally recognised and deeply entrenched pastime to deride the ruling party of whichever country the lambasting pundits happen to reside in. Therefore, it shouldn't surprise you to realise there exists a very specific type of investment risk called political risk! It relates to the possibility that the politicians might do something terribly nasty against the investment community. Still, to be fair to the politicians, one of the most common forms of political risk, a military coup, has nothing to do with them... technically speaking. Other forms of political risk that are precipitated by politicians, however, include generally negative nationalistic moves upon a national economy that cause investments in the affected country to rapidly depreciate. Prime examples of such moves might be the lightning nationalisation processes some countries have enacted in the past. The international investing community is generally savvy enough to accurately identify sweeping politically-driven moves as being comprehensively lousy for investments. Yet sometimes this well-heeled, well-connected group can make mistakes during its hurried evaluations. For instance, between 1998 and 2005 my own country, Malaysia, enacted capital and currency controls that were initially viewed negatively. Very negatively! When they were initiated by then Prime Minister Mahathir Mohamad on September 1st 1998, during the excruciatingly painful Asian Meltdown of 1997-1998, he was perceived as maliciously engineering a textbook example of political risk exploding in the collective face of unsuspecting international investors. But the move brought about currency stability, falling interest rates, rising stock prices and economic strength! In the ensuing years, more and more of those early detractors have chosen to make public statements validating the ex-PM's prescription for Malaysia. Still, that example is perhaps the exception that proves the rule! You see, most other instances of identified political risk do not result in such comprehensive U-turns of pundit consensus. By and large, countries deemed to be hotbeds of political risk become - and stay - economic pariahs for a long, long, long time.