Module 14 - Political Risk

Module 14: Political Risk Module 14: Risk and Politics Learning Objectives • Define political risk and economic nationalism • Enlighten political risk analysis • Describe the risks associated with economic nationalism • Explain the drivers of economic nationalism • Describe methods of managing political risk and lucrative nationalism Overview –Economic analysis of potential international expansion (supply or demand side) does not take into account political risk –Understanding the political context is vital to the success –The time frame of political risk is important • Hedge fund vs. chemical plant location What is Political Risk? –Political risk – the impact of politics on markets • Passage of laws • Foibles of leaders • Rise of popular movements • All factors that whitethorn stabilize or destabilize a country What is Political Risk Analysis? –Political risk analysis • More subjective than economic risk analysis • Broad observable trends • Nuances of society and quirks of personality Political Risk Analysts –Internal • Royal Dutch/Shell • AIG –External • Consultants • AON Why do we need political risk analysis? 1. International Markets more interconnected than ever before 2. The US is making the world a more volatile place (Bush Era, Trump Era?) 3. Offshoring trend is growing 4. Increasingly reliant on energy from political risk states – Saudi Arabia, Iran, Nigeria, Russia, Venezuela Difference between Economic and Political Analysis 1. Economic Analysis – “Can a particular country pay its debt?” 2. Political Analysis – “Will a particular country pay its debt?” Political Risk - Unit of Measure –Stability • Two factors – Strength against shocks – Shocks themselves Strength against shocks –Can political leaders implement policies in spite of shocks that occur –Can they avoid policies that actually build shocks –Countries that can avoid creating shocks and ride out those that do occur are the most stable with regard to political risk Shocks –Internal • Demonstrations in Egypt = Arab Spring • Transfer of power = Cuba, Elections –External • Refugee influx • Tsunami • Terror campaign Stability and response to Shocks –Example: Voting results that are challenged and ultimately decided by court ruling • 2000: US • 2003 Taiwan • 2004 Ukraine • Which two of these led to streets being closed off by protestors and threats of violence • 2016: US Election Corporate Decisions and Stability –Deciding to open a production facility, power plant, call center, etc... How do you quantify stability? –Framework for analyzing shocks and response to shocks for each country –Four categories – Stability Index (DESIX) • Government • Society • Security • Economy Deutsche Series Eurasia Group Stability Index – Government • Current government strength • Rule of law • Level of corruption – Society • Social tension • Youth dissatisfaction • Health, education, etc... – Security • Level of globalization • Geostrategic condition • Disaster response / emergency – Economy • Growth • Investment • Debt • External sector Corporate Decisions and Political Risk –Have the score • Industry • Strategy • Risk tolerance • Compare (energy, light manufacturing, pharmaceuticals) – Same scores, much different responses to those scores Political Risk and Risk Management –Local partners –Limit R&D (protect intellectual property) –Insurance –Hedging (multiple countries / locations) What are the opportunities? –Many organizations today are searching for global opportunities/growth. –Proper international expansion is profitable –Most developed countries the most stable • Least growth opportunities RMI 2302Module 14: The Rise of Economic Nationalism What is economic nationalism? • Wikipedia gives a good definition • Umbrella term that includes economic policies and theories designed to improve the domestic economy relative to far-off economies. • It subsumes theories such as economic patriotism or isolationism. Generally, would oppose globalization and unrestricted free trade What is the risk? • May create an unbalanced international investment climate • Governments may nationalize strategic assets (especially natural resources, infrastructure) • Erosion of profitability of foreign direct investment • Large scale economy – disastrous economic effects globally What is driving the move toward economic nationalism? • Global income inequality • Greater dependency on individual commodities for government revenue • Over-reliance on foreign economies for growth (i.e. China) • Government changes (democracy, de-centralization, regime changes) Examples of economic nationalism • Venezuela (Oil) • Bolivia • Papua New Guinea (LNG) Examples of economic nationalism • High risk industries: mining, power production, petrochemicals, telecommunications, technology • Why? Perceived strategic value Strategies to manage the risks of economic nationalism • Same as previous reading: (limit R&D, local partners, insurance, and hedging) but adds more strategy to the mix • Strategic planning to include: –Scenario planning and stress testing –Address potential stakeholders in development process (e.g. include schools, infrastructure, hospitals in plans)