Financial Executives: 3 Strategies for Managing Geopolitical Risk
A major automaker’s plant seized by Venezuela’s government. The US seeking to renegotiate NAFTA. Tensions rising in East Asia. Major elections in France and South Korea.
And that’s just in the last month.
Political risk remains high on the radar for multinational businesses and their senior leaders. That includes financial executives, who are concerned about the potential impact of geopolitical risks on their organizations’ earnings and growth. These risks can’t be fully eliminated, but financial executives can take steps to protect their organizations.
More than half of finance and treasury professionals have considered the impact of geopolitical events on their organizations’ growth and risks, according to the 2017 Association for Financial Professionals Risk Survey. That should come as no surprise, given the growing list of political, economic, and societal trends that could adversely affect global businesses. These include:
A stagnant global economy. Developed countries’ interest rates remain low, while foreign exchange volatility remains high. Meanwhile, growth in emerging markets has slowed.
- Anti-globalization movements. Major economies are pulling away from multilateral trade agreements and toward protectionism, which could lead to greater unpredictability in developing economies.
- The emergence of a multi-polar world. China, India, Iran, Japan, Russia, Turkey, and the US are competing for influence in many parts of the world. And there’s a strong possibility that these countries’ interests will clash with one another.
For multinational businesses, the potential risks stemming from these trends are far-reaching: Contract frustration, government expropriation of assets, supply chain disruptions, and physical harm to employees. But financial professionals can work with their risk management teams and others to protect against these and other potential exposures.
Among other steps, financial executives should seek to:
- Manage credit risk. Economic crisis often results in sovereign, public sector and private sector defaults. So businesses should review credit-control procedures and evaluate the potential impact of political risk events on their customers and suppliers.
- Build resilient supply chains. It’s important to understand how a crisis in one country can disrupt your global supply chain. And you need to have a response plan in place to allow for the use of alternative suppliers and/or ports, and to communicate with customers and suppliers as needed.
- Protect people. Financial professionals don’t always think about this, but it’s a vital consideration for any organization. Develop and test your crisis plan in advance to ensure effective communication during and immediately following a crisis.
No global organization is completely immune to these risks — and it’s nearly impossible to predict where and when a political risk event will occur. But by taking these steps, financial executives can better prepare for such events and protect their organizations’ assets, people, and bottom lines.