Pim Poppe: Are country risks making a comeback?

October 28, 2025

_{This column was originally written in Dutch. This is an English translation.}

By Pim Poppe, Managing Partner at Probability & Partners

When I started working as a young and eager macroeconomist at ING's Economic Bureau in 1989, one of my first tasks was to assess country risk. At the time, ING (or rather its legal predecessor NMB) had built up enormous exposure in Central America with Brady bonds, so country risk was by no means trivial.

In 1989, the very month I started working, the Berlin Wall fell. Assessing country risk suddenly became a top priority, because the escape of Eastern European countries from Russian influence had greatly increased the opportunities for new markets. Poland, Hungary, the Czech Republic, and Slovakia transformed themselves into democratic market economies. Parliamentary democracies, property rights, enforceable property rights with a legal system, and a free press emerged. State-owned companies were privatized and market mechanisms were introduced.

Based on these foundations, new businesses and market economies emerged. These offered opportunities for ING. Of course, there were also risks associated with individual loans or investments, but the risk at the level of the country as a whole was dominant, and that country risk had to be assessed.

Country risk involves potential losses that may arise from political, economic, or social instability. At the time, we focused primarily on budget deficits, political stability, balance of payments, inflation, convertibility of the national currency, interest rate volatility, and monetary policy. We also paid attention to corruption, inequality, poverty, social unrest, and protests. The idea was that things were improving everywhere, but that a relapse was also possible.

Based on these analyses, we divided countries into high, medium, and low risk. We also proposed country limits to the Board of Directors. These limits were linked to the classification of country risk and the maximum loss we were willing to incur on a country. That maximum loss was linked in a certain way to our own capital. Thinking in terms of country risk was normal.

Country risk became less important

In the years after the fall of the Berlin Wall, country risk became less and less important. Major political instability, expropriation, capital restrictions, etc. disappeared over the horizon. Legal systems and democracies functioned more or less well. Country risk simply became less important for international investing and banking. The focus on and tools for assessing country risk disappeared. It was no longer relevant.

Institutional investors also became less concerned with assessing and evaluating country risk. Slowly, the home bias in investments disappeared and investing according to a global index became more common.

Country risk is once again an interesting angle

Now, in 2025, we are once again at a historic turning point. Instead of improving, things are getting worse. Country risks are not decreasing, but increasing. Geopolitical fragmentation, a trade war, a cyberwar, war over rare earth metals, war over the support of emerging countries. In addition, many countries are facing social unrest and protests, political instability, and voters who no longer believe in politics or democracy.

Many countries are vulnerable. But there are differences. The question is therefore which countries are most vulnerable, where the chances of capital restrictions and trade tariffs are greatest, and where the risks of investment are too high. The question is whether it is worthwhile to delve into this and whether it is an axis along which you want to help shape your Strategic Asset Allocation.

More columns by Pim Poppe

Two perspectives

Recently, we have been facilitating more workshops and knowledge sessions on geopolitical risk. We try to involve boards in the geopolitical risks and the assessment of these risks. We also help with mitigating measures. Sometimes the discussion is only with the directors, sometimes people from the investment organization are also involved. We provide ingredients for the discussion, in which roughly two different views can be distinguished:

• The first view is that the market is right and that we want to diversify as much as possible. In the past, trying to beat the market and adjusting the strategic asset allocation has always worked against us. We use the MSCI World Index as a starting point in the ALM study, and you have to be very good to deviate from it. The fact that we are 70% invested in the US, 20% of which is in the Magnificent 7, is not a problem. In short, we do nothing.
• The second view is that the large weighting of the US in the equity portfolio has made the risks of the US too high. Somehow, the equity weighting of the US must be reduced. Up to this point, there is agreement within the second view. But then the question arises of how to adjust the weightings. There are various alternatives, based on risk allocation, GDP weighting, or, for example, a maximum loss of the coverage ratio. The big problem with the second view is that there is no objective answer. The question is therefore whether you would rather have an objective but wrong answer, or a subjective and more or less correct answer.

Assessing investments along the axis of country risk was once common practice. For a long time, this was less important, but with the current fragmentation of the global economy, with all the international tensions and social unrest within countries, it seems advisable to give country risk a more prominent place in asset allocation again.