Managing risk sometimes means taking calculated risks
Views with Acuity: Insights to Build Resilience (April 30)
Taking calculated risks
We have been programmed to believe that businesses and organizations need certainty to invest, grow and prosper. We’ve heard the concept of a “level playing field” emphasized for foreign investors, the private sector and so many others.
But the field has been increasingly not level, both at a local country setting and globally. The 2008 financial crisis highlighted some of this and the post-2009 easy money period further amplified that this playing field is not remotely close to what the text books say it should be.
Moreover, the idea of certainty - at least in the near-term - is proving to be more of an illusion than ever. From a political-social and macro standpoint, we are likely entering a new period of uncertainty and volatility.
What is a business to do, then? Hoard cash to manage through the uncertainty? Maybe. Or you could lean in to reality, and begin figuring out how to use uncertainty as a comparative advantage. Nimble and resilient organizations did so in the post-2008 world.
Remember: taking calculated risks on solid business models is the key.
Stay safe, stay positive.
Country Acuity Advisors - Insights
IMF rescues, but where are SDG investors? Good times, cheap money and yield-chasing investors led to a boom in frontier markets’ sovereign debt. Now with the pandemic-related tightening in capital due to capital outflows and loss of tourism, remittances and commodity revenues, servicing this debt is a challenge. Not a day goes by without a new country seeking IMF assistance. This is the time for investors who have been championing Environmental, Social and Governance (ESG) and Sustainable Development Goals (SDG) as investment principles to step up. The pandemic will lay bare those who got on the ESG and SDG bandwagon for the optics, as well as those who are truly committed to a more holistic and longer-term view.
Antidote for social unrest? Government capacity. The least developed economies are most at risk from social unrest because they are cash-strapped and unable to provide the basics even during the best of times. Lockdowns are keeping people off the streets for now. But mass social unrest is a real threat. The pandemic is showing an uncanny ability to expose weaknesses. Look for pre-conditions for unrest: weak coalitions, squabbles between the ruling elite, succession issues, and minority-majority tensions, to name a few. Governments that are responsive, have technocratic bureaucracies, have solid security capacity, and that rely on expertise, science and good policy making will weather storms. Cash at hand helps, too.
Fintech, this is the perfect opportunity to crowd into the SME sector. SMEs need cash. Traditional banks, unless prodded or backstopped by governments, are unlikely to take on more risk in this massively uncertain environment. In truth, SMEs are high risk. Perhaps now is the time for fintech firms, which often tout that they will serve the unbanked, to step in and fill the gap. Governments can help by seeding and helping crowd in private capital. Aside from the financial opportunities, there are some basic human principles at play here, too. Think of yourself, and of those who have helped you: don’t you remain loyal to a friend or company that stuck with you or helped you when you were down? Time for some genuine disruption.
COVID-19 downgrades and the Visible hand.Ominous signs for governments across the world. Record low oil prices, a global recession, large amounts of corporate and SME defaults, stalled sources of revenues and record government rescue packages, which all suggest the credit ratings of governments will be under stress. Downgrades may generate a lot of noise in the financial media, and they could have serious implications, but for most, it is not the end of the line. The post COVID-19 world portends a heavy dose of the visible hand of governments, central banks and the likes of the IMF and ‘whatever it takes’ strategies to keep the ship from sinking.
Three Things To Read this Week to Build Resilience
Governments should backstop trade credit. You might not have heard of it, but credit insurance is a vital cog of global trade. The trouble is trade credit insurers also tend to constantly monitor and react to political and economic risk. And when the risks rise, credit notices are issued that withdraw support in certain market segments or countries, which in effect wipe out any cover that was in place (Financial Times, April 23, Free to read)
About that ‘V-shaped’ recovery. If you pick through the recent musings of Wall Street wonks, whether on the economic or corporate side, you’ll find one discernible trend: analysts trying to figure out how fast we return to ‘normality’ once we emerge from our hovels. Things may not be as optimistic as everyone is hoping. Read more (Financial Times, April 22, Free to read)
EU watchdog cautions rating agencies over knee-jerk downgrades. The EU's securities market head says that credit rating agencies should avoid deepening the coronavirus crisis by quick-fire downgrades of countries and companies as the pandemic pushes economies into recession. He added, “But what’s important is the timing between taking into account the increased risks of poorer credit quality and not acting procyclically, and making sure the timing of these downgrades is done in an appropriate way.” (Reuters, April 9 Free to read)
COVID-19 Grants, loans, & other forms of assistance for companies in Asia-Pac - Asia Pacific MSME Trade Coalition (AMTC)
Global Protests Tracker (including COVID-19 protests) - Carnegie Endowment for Peace
Country by country policy responses to COVID-19 - Compiled by the IMF
Coronavirus: the latest - Financial Times tracker (Free to read)
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