Control Risks, a leading world business risk consultancy, has launched RiskMap 2010 – its annual review and forecast of business risk for the year ahead, including a rating of 173 countries by political and security risk. It identifies five countries generally overlooked by investors because they are deemed to be too risky, but which from 2010 may offer considerable value to companies that conduct robust due diligence as part of their risk management. Each has not fulfilled its potential over the past decade due to underdevelopment, internal political strife or adverse geopolitical conditions. Yet each has an impressive natural and/or social resource endowment which, if harnessed and directed more effectively through improved standards of governance, could bring them out of the shadows.
RiskMap 2010 shows that, against a backdrop of uneven and uncertain economic recovery and with the probability of regime change in some of the world’s most prominent political hot-spots in 2010, new social risk and security issues will present business with a different and more complex risk terrain. The report focuses on the following geopolitical and security risks of particular interest to multi-national businesses for the coming year:
- The global economy’s return to growth will be partial and protracted, and over-dependent on governmental stimulus measures. Previous experience tells us that it is in the early period of economic recovery that political and social risk are at their most heightened, when reality fails to meet expectations. A structural rise in unemployment will represent a key macropolitical and security risk in 2010. With multiple political successions in key emerging markets also a likelihood, business has to be wary of being hit by collateral damage in a newly complex business environment
- Terrorism continues to be a threat to business in Europe and North America, notwithstanding improvements in intelligence gathering, prevention work and commercial surveillance. The new threat is more likely to be homegrown, increasingly self-radicalised and low-tech. It is also more difficult to penetrate and less predictable, requiring business to reassess its security provision in 2010
- International corruption will be a key agenda item for UK companies in 2010, with the expected enactment of the UK anti-bribery bill. Formal compliance will be insufficient to mitigate the risks generated by local business partners, commercial agents and consultants working with customs agencies. Businesses will need to strengthen their integrity programs in order to reinforce a culture of clean business.
In addition, there are specialist regional reviews covering: Africa; Americas; Asia; Europe and the CIS; and Middle East and North Africa.
Richard Fenning, Control Risks’ CEO, said: “History tells us time and again that political risks to business are greatest not at the bottom of the economic cycle, but in the first stages of recovery. Whilst being mindful of these risks, successful businesses will also have their eyes open to the opportunities presented during this uneven transitional period. During 2010, organisations will also need to consider the potential implications of the changing nature of the domestic terrorist threat, which while becoming more low-tech, is also becoming more unpredictable.”
Michael Denison, Research Director, Control Risks, said: “Some of our high-risk, high potential return countries may seem controversial. For some businesses these countries should be ones to watch very closely over the coming years, as positive political developments could lead them to become very interesting investment opportunities.”
Highlights of the Riskmap Regional Overviews include:
- With its economy emerging relatively unscathed from the financial crisis China will forge ahead with the expansion of its commercial interests. However, it will need to look beyond the extractive sectors to preserve its dominant investment position among many of its commercial partners. China aside, many of the region’s economies rebounded well from the crisis. The Philippines, Sri Lanka, and possibly North Korea could all become turbulent, albeit for widely differing reasons. Meanwhile, with its new-found political stability, vast domestic market, and natural resource endowment, Indonesia is the Asian country to watch in 2010. The Afghanistan-Pakistan border region will remain central not only to Asia’s regional security, but to global counter-terrorism initiatives
- Latin America has confounded many sceptics with its political and economic resilience. Political institutions have proven to be more firmly moored than was thought. However, while ‘hard’ political risks may be less acute; graft, crime and the tradition of labour activism present enduring project-specific risks in many sectors
- Much of the Middle East and North Africa was also shielded from the worst effects of the recession. Here, economic stability will, in many cases, continue to be bound up with movements in global oil prices, with the prospects of a comprehensive breakthrough over Israel/Palestine still remote. The odds are still stacked against a deal with Iran, but the chances have improved as the leading international players come into closer alignment: any settlement would undoubtedly represent a significant global renewal opportunity for international oil companies and represent a domestic market of huge potential
- In Europe, Russia will look to divest itself of non-strategic assets, creating new opportunities for investors with higher risk appetites, while Western European states will continue to grapple with the fall-out of the recession, at some political cost to incumbent governments.
Control Risks says the five states it has identified as commonly overlooked by investors in recent years for their high levels of political risk, but which may in 2010 offer considerable value to the more adventurous investor. Each, for one reason or another, has not fulfilled their potential over the past decade due to underdevelopment, internal political strife or adverse geopolitical conditions. Yet each has an impressive natural and/or social resource endowment which, if harnessed and directed more effectively through improved standards of governance, could bring them out of the shadows.
Ukraine remains Europe’s biggest security headache. With EU and NATO membership unlikely in the medium-term, and relations between Russia veering from frosty to volatile since the ‘Orange Revolution’ of 2004 over a host of issues ranging from gas tariffs to military basing rights, Ukraine appears stuck in a geopolitical no man’s land. If that were not enough, the country has experienced a prolonged period of domestic political paralysis and economic mismanagement that has brought the country to the brink of sovereign debt default. Yet, this is a state with enormous potential as a leading wheat exporter, coal and steel producer and, with its relatively under-served domestic market of nearly 50 million people, as a venue for investment in financial services and retail sectors. The key test will be whether the presidential election in January 2010 produces a clear winner who can reset relations with Russia and set out a clear reform program with buy-in from key domestic constituencies. A tall order, perhaps, but if it happens expect a rapid pick-up in investor interest.
Peru is a country well-known to leading mining houses as a significant producer of copper, zinc, gold and transition metals such as molybdenum. However, broader fundamentals suggest that Peru is emerging as an attractive investment venue in other sectors, particularly energy infrastructure and financial services. President Alan Garcia has presided over a period of institutional maturation, backed by policy moderation both domestically and in foreign relations, culminating in the 2009 free trade agreement with the US. The security threat posed by the Sendero Luminoso (Shining Path) guerrillas has continued to recede if not disappear, although other forms of social unrest persist. Even if Garcia’s American Popular Revolutionary Alliance loses altitude before the scheduled 2011 election, any successor government will almost certainly be constrained to pursue a relatively centrist course, which suggests that Peru should be looked at seriously by emerging market investors with medium risk appetites.
Mozambique is another state which is seeing the benefits of relative political stability. With Frelimo and President Armando Guebuza entrenched in power into 2010 and beyond, Mozambique may not be a beacon of democracy but it has navigated the global recession comfortably, and new investment avenues, particularly upstream in the oil and gas sector, are opening. If South East Africa is an emerging region to watch closely, Mozambique arguably represents its best opportunity.
Indonesia is rebounding from a troubled decade, which has seen the loss of East Timor and serious unrest in Aceh. At the core of its resurgence is political stability and sound fiscal management by the government of President Susilo Bambang Yudhoyono, who was resoundingly re-elected in July 2009 with 61% of the vote. Relatively light inward investment from developed countries partly reflects the government’s historic protectionism, as well as lingering security concerns, that have not been completely allayed by the Jakarta bombing in July 2009. Nevertheless, with its vast domestic market, natural resource endowment and sound economic management, Indonesia is the Asian player to watch in 2010.
Control Risks’ final choice is probably more controversial. Iran has been a political outcast for 30 years. Its pursuit of nuclear capabilities and sponsorship of violent extremists has greatly disturbed the regional security environment. Its opaque domestic political landscape is hardly more promising, although the protests against the ‘stolen’ 2009 presidential election reflect a vibrant civil society tradition. The odds are still stacked against Iran reaching an accommodation with the international community over its nuclear ambitions, but those odds shortened somewhat in 2009 as the US administration’s policy of blending pressure and incentives has become more refined. Crucially, key international players, particularly Germany and Russia, may be more willing to come into alignment, although China’s long-term Iran strategy remains opaque. Moreover, the Iranian regime is a past master at delay and obfuscation, partially reflecting disagreements inside the system. However, were a deal to be struck, Iran would undoubtedly represent a truly significant global renewal opportunity for international oil companies and a domestic market of huge potential. A case of ‘watch this space.’