Understanding Political Risk

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The politics of a country certainly do have an effect on every business, whether small or large. Governments are always trying to implement policies that foster business and economic growth. However, in their quest to do so, sometimes a lot of red tape, bureaucracy and corruption hinder their progress often resulting in social unrest, kidnapping, terrorism, political instability and uncertainty. All these activities pose a huge threat on the commercial operations and value of the business.

Huge lessons can be learnt from the recent violent clashes between demonstrators and the police force in both Bangkok, Thailand and Kingston, Jamaica. Last week, the Thai government imposed a state of emergency in more than 20 provinces to allow security forces control protests which have so far killed more than 80 people. This morning, the same stance was taken by the Jamaican authorities. A state of emergency was declared in Kingston, Jamaica as police clashed with armed gangs protecting a drugs lord wanted in the United States. The man at the centre of these protests, Christopher “Dudus” Coke is a reputed gang leader regarded more like a godfather by some Kingston residents.

In Thailand, for example, I quote Bloomberg report, “More than 30 buildings were set alight, including the Stock exchange of Thailand’s building, the nation’s biggest shopping complex, owned by Central Pattana Pcl, and at least eight branches of Bangkok Bank Pcl, the country’s biggest lender”.

Some economists have even gone further to say that, the political violence may cost the economy as much as $4.6 billion and curb GDP growth by 1.5 percentage points this year under the current forecasts. There is no doubt that such figures are not confidence boosters. Instead, they drive away investors.

With so many businesses eager to expand abroad and enter new international markets, the big question is, “Do you know and understand the political environment of the country you are about to enter?

Put your business in the shoes of one of the eight Bangkok bank branches or one of the 30 buildings burnt down. Suppose it was one of your offices? The losses are just too much to bear. Maybe you were working on a massive project promising huge returns and then the unthinkable happens. All of a sudden, production comes to a halt and all the hard work is swept down the drain.

So how can your business properly manage its political risk?

• First of all you need to understand what constitutes political risk within your business. Does it mean social unrest, terrorism, kidnapping, war, riots, crime, coups, inflation, tax increases or exchange rate movements? This should be communicated across the organisation.

• Establish what factors drive these political risks. Are the factors external to your organisation and there is nothing you can’t do about it, for example, the violent clashes in Thailand? What is needed here is that you accurately assess these risks and try to minimise the impact for instance, by buying political risk insurance.

Sometimes the drivers are relational. For example relations with the labour force, local communities or host government. For example, the USA government has been and is still accusing the Chinese government of manipulating its local currency. This ongoing debate has led to some tension building between the two governments to the extent that some USA companies with operations in China claim they are unfairly treated by the Chinese authorities. Another example could be that of British reporters kidnapped in Iraq.

Internal drivers could be information related or policy-related whereby some employees fail to obey risk management policies. It could also be lack of understanding of the full exposure resulting in implementing policies that do not completely cover the full exposures.

• Establish political risk mitigation strategies. Having identified the key political risks and their respective drivers, proper risk management policies should be in place. For example, if you’re worried a lot because of high crime rates in certain parts of the country, gather your facts from the statistics office, identify those areas on the map and label them “no go areas”.

You have to make a choice on whether to develop a proactive or reactive political risk management strategy. At this stage you could consider buying the correct type of insurance or put in place business processes and systems that monitor political risk. It could also be that you employ talented and skilled individuals who have an extensive knowledge of risk management and are always monitoring global events on your behalf.

• Continue to educate and create awareness of new political risks to your employees. Risk management is an ongoing process.

Having the right capabilities in place at the right time will help you reduce the cost of political risk damage. It is better to be proactive than reactive as this allows you to identify the centre of the problems, assess areas of improvements and lay out plans of action in advance.

1 thought on “Understanding Political Risk

  1. Thake9263

    Hey this is a great post. I’m going to email this to my buddies. I stumbled on this while surfing for some new music lyrics, I’ll be sure to visit regularly. thanks for sharing.

    Reply

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