Gaining Objective Geopolitical Risk Assessment – Geopolitical risk is often viewed as too difficult to assess objectively, too complicated to measure and too uncertain to manage. Subsequently, institutions are reluctant to include this type of risk in their decision making. This paper, however argues that ‘up-to-date, objective, tailored, and multi layered analyses of regions and countries’ is vital to the survival of any organisation with an international footprint.
1. Understanding geopolitical risk is vital
2. Political turbulence will increase
3. Base decision making on intelligent analysis, not perception
Understanding geopolitical risk is vital
Banks and financial institutions are generally familiar – and generally comfortable – with their understanding and application of various types of risk. Credit risk,counter-party risk, liquidity risk and sovereign debt risk, together with reputational
risk, are all well-known features of the investment and governance landscape.
However, one aspect that has received insufficient analysis and attention in recent years, especially in the rush to invest in emerging markets, has been the loose way in which markets and traders have priced political and societal risk in various regions and countries. Indeed, many institutions, in the face of the scale and complexity of the recent economic and financial crises, have scaled back their investment in geopolitical research and analysis. This has often been justified by arguments that political risk is too difficult to assess objectively, causes and effects are too complicated to measure and manage and outcomes too uncertain to allow effective intervention, action or mitigation.
As recent events in North Africa have shown, despite the dynamic, unstable character of the current and emerging world, some trends and patterns are evident well in advance, even if events themselves still have the capacity to surprise. The seemingly unpredictable ways in which political, demographic and social factors abruptly affect markets and investment assumptions have reminded decisionmakers of the pressing need to re-integrate geopolitical and societal factors into their overall risk profiles.
Without an accurate assessment of all aspects of human activity and the impact of long-term trends within a country and its region, markets and institutions will always be exposed to the sudden appearance of shocks and complexities that have the power to confound the most sophisticated financial modelling and tools.
In addition, the incorporation of political and societal factors provides checks and balances to temper much of the qualitative data that is available.
It is sometimes thought that exposure to political and societal risk is only of concern to companies which are contemplating or actually operating or investing in unstable and insecure countries. However, all organisations operating in the international market and in a regulatory environment are subject to the vagaries of the political process, the dramatic way in which regulatory regimes can change and the complex dynamics of the societies with which they deal. In an interconnected and fast-moving world, all risks are inter-related and a single set of risks can produce a range of unexpected different risks, either directly and indirectly. In large, de-centralised and highly-geared organisations, these interconnections and
implications can be often missed.
Political turbulence will increase
It is clear that the impact and influence of political and societal issues will increase in importance in the coming years, with increasing levels of turbulence associated with uneven globalisation, wars, civil unrest and frequent shifts in political and regulatory regimes. As a result, leading corporations and organisations are recognising that politics and societal factors are as important as economic rigour and pricing in securing market outcomes across their areas of investment and operation.
Gaining Objective Geopolitical
Risk Assessment Contents
Base decision making on intelligent analysis, not perception In order to provide comprehensive, sensitive and balanced risk profiles that
can shape and lead investment, as well as guide decision-makers and ensure good governance, it is essential that banks and institutions access to up-to-date,objective, tailored and multi-layered analyses of regions and countries.
It is no longer sufficient for enterprises to rely on broad assumptions and indirect, filtered data in forming their assessments; a more nuanced, objective of view of countries,based on the motives and patterns of behaviour of leading personalities and institutions in their proper context, is required. This approach recognises that the various paths that lead to the future are determined by human decisions and reactions to events that reflect a complex, ambiguous range of influences and pressures that constantly changes over time.
As business and investment, in its many formal and informal manifestations, are profoundly human activities, the backgrounds, motivations, cultural assumptions and psychological influences that determine individuals’ decisions and actions are vital to anticipating broader trends and tendencies within each country and to understanding the likely course of future events. It is also necessary to take into consideration the complex, apparently opaque human networks, unfamiliar cultural characteristics and distinctive patterns of group behaviour within societies, all of which define the way in which business is conducted and political decisions are made.
Similarly, decisions and investments are, too often, made on the basis of regional trends at the expense of detailed analysis of the complex features and indicators that are unique to individual states, regimes and notable individuals. The evaluation of country risk necessarily has to take into account those transnational and regional themes that affect states over time in different ways and then relate them to national policies and institutions, as well as to events and features that occur at local level.
Loading...