Heightened geopolitical risks in Asia and the Middle East keep global firms on edge

Businesses are turning to credit insurance to navigate risks and safeguard their financial stability.

In the past 12 months, the world has borne witness to a rise of new geopolitical risks, which has seen global firms paying closer attention to a rising number of threats and seeking adequate protection in the face of current and potential shocks.

The escalating conflict in parts of the Middle East and ongoing concerns about instability in the South China Sea are both red flags that corporations are paying attention to, not only regionally, but across the globe and as we approach 2025 the prospect of further geopolitical shocks remains elevated.

China: A geopolitical focal point

Across the Asia-Pacific region, China remains a focal point for geopolitical risk.

China's growth and increase in global influence have been accompanied by a concerted effort to expand its influence in the Asia-Pacific region and beyond. Through a combination of economic strategy, specific partnerships and military assertiveness, Beijing is attempting to shape the geopolitical landscape of Asia. 

Economically, one of the most visible aspects of China's presence in Asia is its Belt and Road Initiative, which has been instrumental in fostering infrastructure development across the region and bringing much-needed investment to many countries. Additionally, there are obvious economic alignments such as in Indonesia, the world's top producer of nickel, a key battery material, which has tapped into Chinese investment to boost the capacity of nickel ore processing whilst partnering with Australia to procure lithium. This has enabled China to deepen trade ties with countries in Asia, giving it significant leverage in regional economic affairs and prompting a re-evaluation of traditional alliances, with some countries in the region seeking closer ties with Beijing at the expense of their relationships with the United States and other Western powers. 

Additionally, ongoing tensions with Taiwan and the border dispute with India have had measurable economic impacts. More broadly, Beijing's efforts to assert its territorial claims in the South China Sea, have led to increased tensions with neighbouring countries such as Japan, Vietnam, the Philippines and Indonesia. 

This can create political and trading instability as well as offering the risk of miscalculation and conflict as it drives response from its neighbours feeding into the potential for an increasing escalation. Politically and economically, Australia has seen the impact of this in recent years, whilst the impact of US tariffs and sanctions had a significant effect across multiple industries and companies, not just in China but across Asia and Europe.  
The US election and trade tensions

We must also consider the US, which is in an election year with the potential for a return to office by the Republican party. One of the defining features of Trump's first term was his trade policies, and imposition of tariffs on Chinese goods and his ‘America First’ approach. 

It is reasonable to expect this situation to continue or even escalate, which could lead to further trade tensions with China and other Asian countries. Will Asian states face pressure to ‘take a side’? Will there be a military pullback by the USA? And what will be the consequences of this unpredictability?  This could disrupt supply chains and impact export-oriented economies in the region, such as China, Japan, and South Korea.

As Beijing continues to assert its influence in the region, the impact of Chinese policy will remain a central feature of Asia's geopolitical landscape. As regional and global powers react, there is the potential for further political or economic uncertainty.

Conflict in the Middle East

The Israel-Hamas war has heightened geopolitical risks and reversed the previous trend of regional de-escalation, as evidenced by the deteriorating sovereign sector outlook in the Middle East. These geopolitical tensions have created significant uncertainties for both the Middle East and the global trade landscape, impacting both developed and emerging markets globally.

According to Fitch's latest Global Credit Outlook for 2024, the conflict is negatively affecting neighbouring countries, particularly Egypt, Lebanon and Jordan. As well as the tragic impact on human life, regional geopolitics pose risks to tourism, trade, investment and public finances. The Middle Eastern economy faces risks that feel both new and familiar. If the Israel-Hamas conflict expands, Middle Eastern countries could face further disruptions to oil trade routes or production capabilities and a significant negative impact on non-oil activities, potentially hindering their long-term economic diversification efforts. This could create ripple effects on the global economy, complicating the business environment.

On a positive note, higher oil prices may offset these challenges, and credit growth is expected to return to pre-pandemic levels. Banks are likely to maintain sound profitability, adequate liquidity, and capital buffers, with asset quality remaining stable.

S&P's latest Global Credit Outlook for 2024 forecasts the global economy to grow at 3% in 2024. Nevertheless, high inflation, reduced savings and tighter financial conditions are expected to persist, resulting in stagnated growth. Amidst these turbulent conditions, easing trade, supply chains and liquidity are top priorities for many businesses. According to the International Credit Insurance and Surety Association (ICISA), credit insurers have underwritten nearly USD 3 trillion in trade globally highlighting their critical role in these times.

Credit insurance as a risk mitigation tool

To help companies mitigate these impacts, trade credit insurance products offer an array of solutions, which can be tailored to suit a company’s specific needs. These solutions include specific risk, named obligor and Excess of Loss structures, which protect companies against the potential of protracted default and insolvency, provide secured protection against non-payment risks, flexible pricing, coverage customisation, improved access to financing and enhanced credit management.

Recent defaults amongst large conglomerates may further drive interest, as large corporations seek certainty in coverage and stability as part of their long-term strategy. With a challenging road ahead, CFOs should seek solutions that protect their balance sheets from bad debts and maximise working capital efficiency. 

Therefore, both insurers and clients in the credit market are encouraged to adopt long-term strategies. The evolving landscape and changing business needs require proactive and forward-thinking approaches to credit solutions, positioning themselves for future success.