To some, this may sound alarmist. After all, Euro debt talks
have come and gone, and the Middle East seems to be in perennial
crisis. However, this time may be different. In the case of
Europe, there are few tools left in the toolkit. The European
Central Bank (ECB) has thrown just about everything it has at
the overall regional debt crisis, and southern Europe seems only
to have gotten worse with time. In the case of Greece, we are
nearing the end of the road—just how much additional money can
be thrown at Greece remains to be seen. In the case of Spain,
Italy, and Portugal, there is little desire on the part of any
of these governments (or their electorates) to accede to any
more austerity measures. In the absence of that, there is very
little the ECB or European Parliament can do to turn the tide.
As for the Middle East, it seems clear now that Assad's
government cannot last too much longer in Syria, with opposition
forces having organized themselves, receiving more funding and
heavy arms, and slowly taking control over more territory; 2013
is likely to be the year Mr. Assad's regime falls. This creates
more uncertainty and raises the specter that the power vacuum
will be filled with Islamic extremists, bent on further
destabilizing the region. Opposition rallies have resumed in
Egypt, with President Morsi's proclamation of supreme self-power
having been met with recurring street demonstrations. Even if he
manages to retain office, the only people who will trust him now
are members of the Muslim Brotherhood. Jordan may be the next to
experience the full power of the Arab Awakening. And, if Israel
is to bomb Iran, it certainly seems that 2013 will be the year
that it happens.
On top of all that, tension is rising between China and the
United States, which are jockeying for influence in Asia, with
implications for a variety of countries in the region. Countries
throughout the region have already declared their allegiance to
one side or the other, with standouts such as Myanmar seemingly
up for grabs. Tension has reached postwar highs between Japan,
China, and South Korea over ownership of the Senkaku and
Takeshima Islands. Economic nationalism is alive and well in
natural-resource-rich countries in Asia and beyond.
Against this backdrop, risk managers would be wise to begin
preparing contingency plans for what promises to be a wild ride
in the medium term. The first order of business would be to
evaluate potential assets, liabilities, and projects that could
be exposed to cross-border risk, with the objective of
mitigating exposures now.
Identifying such exposures will help risk managers quantify the
potential impact of a worst-case scenario, while at the same
time enabling them to stress test the tools currently available
to them against simulations. This is a critical juncture during
which potential gaps in coverage can be assessed and insurance
and other mechanisms for controlling risks can be updated to
reflect the changing landscape.
Uncertainty also creates opportunities, and corporate risk
managers and internal stakeholders (such as boards of directors,
investment committees, and chief financial officers) should be
able to ask the right questions of proposed cross-border
investments. Too often, decision makers hesitate to ask
difficult questions for fear of the answers that may result, but
this is clearly not a prescription for long-term success. We
have seen too many instances where the wrong questions were
asked, leading to project failure.
While foregoing a planned investment in its totality may seem
prudent, based on a high degree of uncertainty, it could also
cost your firm long-term competitive advantage and access to new
markets and resources. Uncertainty about the future calls for
deeper levels of pre-investment due diligence and risk
management audits, which should result in plans for action.
Moreover, while the costs associated with country risk will
certainly weigh on cross-border investments in difficult times,
gaining first mover advantage and having limited transnational
competition in new markets should be factored into the
As 2013 nears, we leave you with some practical guidance to
help maneuver through the turbulent times:
- Identify cross-border exposures to lives,
assets, and liabilities, factoring in the
risk/reward tradeoff in your assumptions. Don't
rule out worst-case scenarios in your analysis.
- Analyze the potential impact on your
organization should the worst materialize, and
start simulations based on that, rather than
assuming that the worst cannot happen.
- Evaluate and stress test risk control
measures, reserves, and contingencies, including
a comprehensive review of your insurance
portfolio before markets "harden."
- Make special provisions for your "people at
risk," given the potential volatility and
increase of mass exodus events.
- Acknowledge what you don't know, and avoid
the perils of "group think" by engaging unbiased
decision support in the form of external
experts, consultants, and risk managers. It pays
to be circumspect in these uncertain times.
We would like to believe that all the issues identified in
this article will turn out well, but we don't believe they will.
From all accounts, 2013 looks to be a particularly challenging
year for risk managers. If the past 4 years have taught us
anything, it is that anything is indeed possible. Those who will
weather the storm well will have done their homework and will
have been realistic about what may go wrong.
is managing director of partner solutions with
Daniel Wagner is chief
executive officer of Country Risk Solutions and author of the book