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Political instability: the ripple effect on cross-border deals

Political instability: the ripple effect on cross-border deals

Written by Joe Allison, Peregrine Law

As the world has become increasingly connected and collaboration more common, there has been a natural rise in cross-border legal work and the number of deals. While transnational deals can expose businesses to a wealth of advantages, including access to fast-growing consumer markets, these deals also carry an element of risk. This is especially the case in regions with political uncertainty.

There are several risks associated with political instability, including:

  • a weak legal framework – risks in enforcement and regulation will undermine the confidence in any cross-border deal
  • a fickle economy – an economy without settled fiscal and monetary policies creates huge uncertainty for financial investments
  • policies of the local government – if the incumbent administration favours protectionism or the nationalisation/expropriation of foreign assets then this is a major risk for investing businesses
  • human rights – if a country or a government has a reputation for violating human rights then businesses will need to strongly consider how their brand perception might be affected

Case example: As Malaysia welcomes new prime minister Mahathir Mohamad, the country is fighting to escape the legacy of a major political corruption scandal involving their former leader, Najib Razak, accused of embezzling $3.2bn from a government fund. Malaysia will hope strengthening the rule of law will help reinforce investment regulations and enforcement mechanisms, therefore, attracting greater interest and confidence from foreign businesses.

Malaysia’s current uncertainty demonstrates how the risks investors must navigate in global business are subject to sudden change. Yet this might be no reason not to invest. More than ever, businesses have the tools to make more informative risk assessments and diversify their supply chains, thereby safeguarding their international portfolio.

Uncertainty is nothing new; the M&A market has remained resilient despite a perceived lack of clarity both in the US and globally, for example in tax reforms and trade tariffs. The US spearheaded the start of 2018 with a 59% jump in M&A activity during Q1 compared to last year, as reported by Thomson Reuters.

Assessing the trends in cross-border deals is likely to remain as exciting as it is challenging. For example Brazil’s national election later this year and new competition laws are likely to affect cross-border activity, the extent of which is debatable. The sway of politics was noticeable last year as Shinzo Abe’s re-election in Japan coincided with a 103% rise in inbound M&A activity compared to 2016 (according to Mergermarket).

Ultimately, political uncertainty alone should not necessarily scare away foreign businesses. Prospective investors will need to be thorough and ambitious when assessing possible deals, while remaining aware of the potential impact of sudden political changes. The challenges presented in international deals, however, should not undermine the exciting opportunities available.