Government risk manifests when the actions of government increase uncertainty with respect to an organisation, project or activity.
Government risk is considered a general risk categorisation primarily used to describe the potential impact of changes in legislation or policies of the executive branch within existing legislation, uncertainty due to electoral factors or demonstrated behaviour of a government or jurisdiction that increases likelihood of instability and therefore uncertainty of decision making. Managing government risk exposure can be achieved through existing internal
risk management processes, adherence to ISO standards via custom tools or through third party expertise.
Unlike broader and well accepted definitions for related issues such as
political risk
Political risk is a type of risk faced by investors, corporations, and governments that political decisions, events, or conditions will significantly affect the profitability of a business actor or the expected value of a given economic action. ...
, government risk has a more micro focus on specific risk issues or indicators that may be unique to a project, reform or investment such as regulatory issues or poor reputation of actors in question due to previous compliance failures which elevate the government risk profile for that specific matter (and in the latter case, the
reputational risk
Reputational damage is the loss to financial capital, social capital and/or market share resulting from damage to a firm's reputation. This is often measured in lost revenue, increased operating, capital or regulatory costs, or destruction of sh ...
of the actor in question is a leading indicator of potential elevated government risk).
An example of government risk is when poor behaviour of an industry or sector leads to a government policy or regulatory response, such as the range of reforms to the Australian financial services sector arising out of the 2017-2019 Australian
including a specific targeting of the financial advice sector.
This specificity of issues and indicators means government risk can be assessed at a
subnational level such as a province or state government jurisdiction or even at
local government
Local government is a generic term for the lowest tiers of public administration within a particular sovereign state. This particular usage of the word government refers specifically to a level of administration that is both geographically-loca ...
level.
In an investment context, it is typically referenced as distinct from other forms of risk, such as
market risk
Market risk is the risk of losses in positions arising from movements in market variables like prices and volatility.
There is no unique classification as each classification may refer to different aspects of market risk. Nevertheless, the most ...
,
credit risk
A credit risk is risk of default on a debt that may arise from a borrower failing to make required payments. In the first resort, the risk is that of the lender and includes lost principal and interest, disruption to cash flows, and increased ...
, price risk, and
natural risk when assessing the viability of an investment project.
Distinction from Country Risk
It is often confused with the term "
country risk
Country risk refers to the risk of investing or lending in a country, arising from possible changes in the business environment
Market environment and business environment are marketing terms that refer to factors and forces that affect a firm's ...
" when assessing investments in foreign countries, but government risk is in fact a subset of country risk. Specifically, government risk refers only to interactions with government, but not the following elements of country risk:
* crime and property security
* currency risk
* different cultural norms around business ethics
* monopolies or business conglomerate power within in-country markets
References
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Financial risk