Wednesday, February 23, 2011

Growing Political Unrest Calls for a Fresh Look at Risk Management

As political instability spreads throughout the Middle East like a wildfire, the risk associated with operating in emerging markets is keeping managers and investors alike on their toes.  Unrest in Egypt left Coca-Cola, Procter & Gamble and other foreign multinationals no other choice but to bring local operations to a halt, mirroring a similar move made by Cisco and Fidelity in Tunisia weeks before.  The panic felt by nervous investors, still jittery after the global financial crisis, triggered a massive flight of domestic capital and foreign investment, wiping nearly $50 billion from Arab stock exchanges.  Not surprisingly, risk management firms are advising their clients to start planning for the effects of spreading turmoil throughout the region, and interest in political risk insurance has spiked as companies scramble for ways to protect against potential losses.

These developments highlight a sensitive issue for firms operating in emerging markets: how to react to unforeseen changes in political environments?  Some of the countries affected by the current wave of unrest once appeared stable to outsiders due to the presence of longstanding autocratic governments, but a closer look would have revealed an undercurrent of growing unrest.  Political risk is about more than just the possibility of change in political regimes; it encompasses complex social and economic forces that can shatter the established order.  The need for quality information on these forces is clear, yet respondents in a study from PricewaterhouseCoopers cited the difficulty in accessing vital risk information as a major impediment to business planning.  Moreover, the study shows that although a high percentage of multinational managers engage in ongoing monitoring of country political environments, most feel they lack effective political risk management processes. 

The recent developments underscore not only the importance of performing political risk assessments that incorporate social, political and economic conditions and their impact on the local operating environment, but the need for conducting such assessments on a continual basis.  Changing risk landscapes are creating new issues that were not on the radar a decade ago, such as rising geopolitical tensions in Asia, the rapidly rising cost of food and politically motivated decisions to enact capital controls.  Firms can mitigate risk through the development of effective risk management plans for both new opportunities and existing operations in foreign markets.  Despite the concern over political instability, the growth potential for emerging markets remains strong, and businesses can capitalize on this growth by keeping their ear to the ground in periods of stability and turmoil alike.

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