Assessing Interconnection & Disconnection in Global Risk

2018 Global Risk Assessment & Mitigation Strategies for Finance

Policy Areas Finance Leaders Should Watch in 2018

In a landscape of changing global risk, the finance leader’s role as one of their organization’s data stewards puts them in a position to help their firms stay abreast – or even ahead – of risk. The finance leader’s prominent role gives them responsibility for developing and disseminating a cross-functional data strategy to meet the needs of a market environment where volatility is the new normal.

Much of that volatility stems from globalization and, in recent years, ‘de-globalization.’ What follows is a roundup of key policy areas that are becoming more important for today’s finance leaders, as well as a few macroeconomic trends that analysts are monitoring closely.

A key step for all finance leaders is to take a geopolitical audit, analyzing the impact of shifting global and regional patterns on their business relationships.
Bodhi Ganguli
 

Key Policy Areas to Monitor

While most key global economies are finally synchronized and expanding, the last global recession permanently altered some institutions and strained a few others. For example, central banks have done much of the heavy lifting to mitigate the effects of the global recession: heading into 2018, almost all central banks are stretched, and if there is another negative shock they might not be able to provide the same monetary support as when the coffers were full in 2008.

 

With rising fragments of various economies experiencing upheaval, the impact of international laws and political relationships is in flux. Political events such as Brexit and the 2016 US election have raised questions on the new shape of migration laws and borders. In the economic sphere, emerging markets, led by China, are starting to slow. With emerging economies like China serving as engines for global growth, these slowdowns will likely have multiplier effects. Elsewhere, regime instability in oil-producing nations, such as the crackdown on Saudi Arabian corruption, can cause commodity prices to spike at a moment’s notice, even if they have generally remained low.

Finally, the rapid development of a cyber-dependent global economy is equally significant. In 2017, the global economy experienced cyber-attacks that increased in sophistication far more quickly than the countermeasures to detect and prevent them. As interconnectedness shows no sign of decelerating, Dun & Bradstreet ranks the possibility of technology issues disrupting the business operating environment among the top ten risk factors in its quarterly Global Risk Matrix. 

Boycotts and De-globalization: Key Macroeconomic Trends

The most important trend for finance leaders to monitor is the changing scope and impact of multilateral trade agreements. While campaigning, President Trump had voiced intensions to redefine NAFTA, but later opted for a rewrite. Although Trump’s argument against NAFTA-centered on trade deficits, the deep integration of supply chains over recent decades means that quantifying the impact of US withdrawal requires a much more nuanced analysis

However, there will be life after changes to NAFTA. Important new deals to monitor will be what new deals Mexico signs, as well as determining the impact of reversion to the pre-existing US-Canada free-trade pact. 

Supply chains can also fluctuate based on boycotts like the one being carried out against Qatar in the Middle East. After Qatar’s official news ministry was hacked, the Qatari Ministry of the Interior blamed the UAE. The UAE, along with Saudi Arabia, Egypt, and Bahrain (the ‘Quartet’) responded with a boycott that has rewired supply chains and impacted all aspects of operations in the region.

Risk Mitigation Strategies Against Policy-induced Volatility

Savvy finance leaders must stay alert to how politically-inspired actions among countries can affect supply chains, customer and partner relationships, and the business operating environment. Political trends like de-globalization and intra-region instability are becoming the norm, not the exception, in our new global landscape. Finance leaders need to be aware of where this volatility can come from, as political issues that seemingly have little to do with transnational businesses can nevertheless restrict people-flows and the free movement of goods and capital.

A key step for all finance leaders is to take a geopolitical audit, analyzing the impact of shifting global and regional patterns on their business relationships. Questioning business planning assumptions, exploring possible changes to the corporate structure, and maximizing supply chain and customer and partner visibility means that when volatility does strike, the organization is equipped to make the right decisions, quickly.

Assessing both macroeconomic and microeconomic risk helps finance leaders to stay ahead of disruptions in their customer, partner, and supplier portfolios. Using tools such as predictive modelling and analytics, leading and joining teams to do scenario planning cross-functionally, and exploring the linkages, risks, and hidden stories in both internal and external data should be a part of every finance leader’s strategic planning routine.