December 14, 2020

Monitoring Risks to Your International Business Beyond Covid

As evidenced by the multitude of posts on this forum regarding risks, I appreciate the following assertion by The Economist Intelligence Unit (The EIU): "Managing risk in an increasingly bifurcated world in the midst and aftermath of the Covid-19 pandemic will continue to dominate the thoughts of risk managers."

The report, which also includes a selection of risk scenarios, looking beyond those directly linked to the pandemic, that should be firmly on the radar of risk managers owing to the scale and intensity of the potential disruption that they could cause, adds that "[d]ivergent recovery speeds, differing policy responses, global supply-chain readjustments and ever-present political instability create an enormously challenging global business environment. Looking beyond that, there is a long tail of country risks, not directly related to—but many clearly exacerbated by—Covid-19 that businesses are going to have to understand to ensure that they can be managed."

Those who are engaged in conducting commercial or investment transactions in foreign markets will appreciate that The EIU's "core country growth forecasts are complemented by a comprehensive risk audit to provide a full understanding of both the opportunities and risks facing businesses."

As indicated in the chart above, The EIU is "forecasting global economic growth of 4.2% year on year in 2021, on the back of an anticipated 4.7% contraction in global output this year. The report notes that "this number masks enormous regional disparities."

What is more, The EIU is "forecasting huge divergence in the speed of recovery for individual economies, based on multiple factors: fiscal space and commitment; monetary policy flexibility; sectoral composition; severity and timing of lockdown measures; export market exposure; and labor market dynamics and demographics. This divergence, straddling as it does already inflamed global trade tensions, cements our expectation of an increasingly bifurcated world.

"We have produced a series of analyses that spotlight key issues to watch at a country level in 2021 (Things to watch in 2021). Our core scenario for these countries, in terms of their recovery, is informed by the above checklist. However, there are other recurring themes that will shape the growth outlook and the business environment for these markets in the coming years."
1. Global trade and supply chains are being reshaped; countries are striving to diversify their export markets and jostling to capture redirected manufacturing investment, while companies are concurrently seeking to diversify their supply chains.
• The reassessment of the risk versus reward equation—as companies weigh up labor costs, political stability, FDI policy and the benefits of localization versus specialism—will create new investment hotspots and strengthen some existing investment centers. There will be some limits on supply-chain rebalancing: the benefits of specialization will be hard for both companies and economies to give up, and companies will also have to accept higher production costs.

2. Political instability continues to be a threat; joblessness, poverty levels and rising inequality have only been worsened by Covid-19.

3. Many countries are newly prioritizing substantial investment in infrastructure. Financing models will vary amid widespread fiscal constraints, but with record-low interest rates in many places helping. Infrastructure investment will be pursued to facilitate job creation and, in some cases, to try to keep the potential for social unrest at bay.

It is important to note that risks to The EIU's "core country forecasts abound. Accelerated vaccine rollout and an unleashing of pent-up demand could cause several countries to surge ahead on this chart. Conversely, in other countries the labor market may be severely diminished for an extended period, weighing on post-pandemic demand and creating recovery laggards."

Lastly, the report contains maps that depict The EIU's "current global growth forecasts for 2021 and highlight the aforementioned divergence. They also highlight a handful of key country risks, looking beyond direct coronavirus-related risks.

"These are not part of our current growth scenario for the next year or two; rather they represent risk scenarios that could substantially change the business operating environment."

Which risks do you think could have the biggest impact on your business? Are there risks not mentioned in the report that you are monitoring?

Aaron Rose is a board member, corporate advisor, and co-founder of great companies. He also serves as the editor of GT Perspectives, an online forum focused on turning perspective into opportunity.

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