The financial market meltdown, competition for increasingly scarce basic commodities and a new leader in charge of the world’s largest superpower will all contribute to a challenging political risk environment for business in 2009, according to a new report, Risk Map 2009, from consultancy Control Risks.
However, the risks might not always be changing in the ways we would expect.
Financial markets in crisis
While many fear that the financial crisis could lead to a new era of nationalism and protectionism, it does not necessarily follow that this will lead to higher levels of political risk, says the report.
“The financial crisis has—if anything—demonstrated that the global economy remains deeply interconnected and dependent on forging compromises between domestic politics and international capital,” says Control Risks.
And although few regions or countries in the world will be left unscathed by the looming global economic recession, those firms that undertake detailed risk analysis will find some good investment opportunities where rivals fear to tread.
“In 2009, political risk will become still more significant as business is forced to negotiate an increasingly difficult and uncertain landscape,” says Control Risks Research Director Adam Strangfeld.
“But not all countries will have the same degree of exposure; and differentiating clearly between markets will become a critical factor in making successful investments.”
Though countries, including the US, UK, Russia, Brazil and Mexico, are exposed to the global financial crisis, the report highlights that they may also have the greatest ability to ride out the crisis, with the money to bolster their economies, such as by bailing out ailing banks, to guarantee debt obligations and intervene in the currency markets to preserve their international credibility.
“The most risky countries are not necessarily those that are the most exposed,” says Control Risks, “but rather those that have the fewest options with which to respond. For businesses looking to maintain or make international investments, it is more important than ever to choose deals carefully and undertake comprehensive risk assessments of their prospects.”
The drop-off in demand for exports and slide in resource prices caused by the global economic slowdown spells particular danger for those states whose budgets have exploded in recent years and who rely on commodities—such as oil—for their revenues, warns Control Risks.
Meanwhile, business is likely to find the operating environment increasingly unstable in states that used high commodity prices and cheap and freely-available international credit to run large budget deficits as the global economic recession begins to bite, the report concludes.
Resource scarcity will also impact the political risk environment for business next year. While commodities like oil, copper and tin have become more affordable, halving from their record peaks in the first half of 2008, companies cannot become complacent and must get used to living in a ‘post-surplus world’, Control Risks cautions.
“Scarcity will weigh heavily on 2009,” the report says. “Looking ahead, the key resources that underpin economic growth seem to be in ever shorter supply—and many observers fear that a scramble to control what remains will breed conflict, social unrest and political instability.”
The worldwide grain crisis earlier this year, triggering food riots in countries across Latin America, Africa and Asia was in part due to the drive for biofuels to diversify away from dwindling fossil fuels—evidence of how policies to tackle shortages in one area can have unintended consequences elsewhere.
Companies need to work together with governments to help manage the increasingly scarce stock of global resources and must work harder to understand how local and international pressures should inform their investment and operational decisions, says Control Risks.
The Obama effect
A third factor, the election of Barack Obama as the 44th President of the US, has also raised expectations of a step change in international political relations. But despite the change in administration and outlook, US strategic interests have not changed, according to the report.
These include preventing Iran from acquiring nuclear weapons and limiting the influence of Chavez’s Venezuela in Latin America. Meanwhile, the military stress imposed by the Iraq war would make expansive foreign operations unlikely, at least in his first term, says Control Risks.
“The likelihood of significant change on most foreign policy issues is relatively low,” it says. “Those expecting quick fixes and massive policy changes are set to be disappointed.”
The report concludes that, in the short-term, America’s Presidential election result is unlikely to lead to any reduction in the level of business risk.
Indeed, Obama’s “softer” approach may actually encourage rival nations, terrorist groups and aspiring politicians to test his foreign-policy mettle, attempt to hijack his foreign policy and try to force him into a tougher stance.
“It would not be surprising to see several large attempted attacks on US soil or US interests abroad in the first few months of the new administration,” Control Risks warns, suggesting a potential increase in exposure not just for US companies at home and abroad, but for all those who could get caught up in collateral damage.
An opportunity to review risk management strategy
Against this backdrop of uncertainty, the political risk climate is continuing to change and evolve. “Security flashpoints will intensify, and business will face a challenging landscape of political risk and complex investment opportunities,” concludes Control Risks.
As they plan and prepare for 2009, businesses would be advised to look behind the headlines in order to understand how their own risk profile might be shifting, allowing them to review and update their risk management strategy accordingly.