Control Risks, the specialist risk consultancy, has published its annual RiskMap forecast, widely renowned as the leading guide to political and business risk and an important reference point for policy makers and business leaders alike.
Speaking about the document, Richard Fenning (CEO at Control Risks) observed: “The unexpected US Presidential Election and European Union Referendum results that caught the world by surprise have tipped the balance to make 2017 one of the most difficult years for business’ strategic decision-making since the end of the Cold War. The catalysts for international business – geopolitical stability, trade and investment liberalisation and democratisation – are facing erosion. For its part, the commercial landscape among Government, private sector and non-state actors is becoming more complex.”
The high levels of complexity and uncertainty attached to the key political and security issues for the year, as highlighted by the RiskMap, mean that Boards of Directors will need to undertake comprehensive reviews of their approaches towards risk management.
Control Risks has identified the following key business risks for the New Year ahead:
Political populism exemplified by President-elect Trump and Brexit The era of greater national control of economic and security policy ushered in by the US Presidential Election and Brexit provides increased uncertainty for business leaders. Caution prevails because of the lack of political policy clarity from the USA and the UK and the impacts on the global trading and economic environment, as well as geopolitics.
Political sparks will fly as the new American Presidency places pressure on the economic relationship between the US and China, which is vital for the stability of the global economy, while the US withdrawal from the Trans-Pacific Partnership threatens to redraw trans-Pacific commerce.
The calls across Europe for further referendums on EU membership are causing nervousness and populism in other parts of the world such as sub-Saharan Africa which adds further fuel to investor risk.
Persistent terrorist threats The threat of terrorism will remain high in 2017, but become more fragmented. The eventual collapse of Islamic State’s territorial control in Syria and Iraq will lead to an exodus of experienced militants across the world. Responding to terrorism is becoming ever-more difficult for businesses. Risk adjustment is critical, including Big Data solutions and reviews of potential insider radicalisation, physical security and scenario planning.
Increasing complexity of cyber security 2017 will see the rise of conflicting data legislation. US and EU Data Protection regulations remain at odds. The EU’s Single Digital Market is isolationist and China and Russia are introducing new cyber security laws. This will lead to data nationalism, forcing companies to store data locally, at increased cost, as they’re unable to meet regulatory requirements in international data transfer.
e-commerce will be stifled. In parallel, fears of terrorism and state-sponsored cyber attacks will exacerbate national legislation, adding additional burden to businesses.
A potential brake on US regulation could lead to a transformation of the global regulatory environment The US adherence to the Paris climate accords is under question, the Dodd-Frank Act could be modified substantially and the Foreign Corrupt Practices Act isn’t off limits, either. This could have a domino impact on regulation around the world.
Intensifying geopolitical pressures driven by nationalism, global power vacuums and proxy conflicts Syria, Libya, Yemen and Ukraine are likely to remain intractable conflicts, while the Middle East will continue to be shaped by friction between Saudi Arabia and Iran. China’s increased focus on diplomacy and military influence will extend from Central Asia and the Indian Ocean to sub-Saharan Africa. North Korea’s systematic nuclear capability development is upending a relatively static regional and global nuclear status quo.
The militarisation of strategic confrontations by accident or miscalculation While major conflicts remain unlikely in the South or East China Seas, for example, further militarisation of disputes among China, its neighbours and the US is likely. Saudi Arabia and Iran continue to jockey for position in the Hormuz and Bab el-Mandeb straits. Iran’s nuclear deal has emboldened the country to challenge the US-Saudi security infrastructure. Russia is likely to maintain substantial air patrols in or near European airspace. It will continue bolstering its Black Sea and Mediterranean naval fleets to secure its positions in Crimea and Syria.
Richard Fenning continued: “Digitisation and the Internet of Everything transports risk everywhere. The distinction between safe home markets and dangerous foreign ones has largely gone. The sheer mass of stored data, teetering on a fulcrum between asset and liability, has shifted the gravitational centre of risk.”
Control Risks’ CEO added: “Terrorist attacks across continents in 2016, made possible in large part by the Internet, have shown that Islamist-inspired violence can be planned and carried out anywhere in the world. Also, with the seismic shift in risk scenario planning now required by businesses, we can expect the competitive playing field in many industries to witness significant change as organisations respond in different ways to the multitude of complexities facing them.”
In conclusion, Fenning stated: “By the end of 2017, we will know whether or not the global economy withstood the shocks and turbulence of 2016, if the US opted for a new definition of how to exercise its power and if the great experiment in globalisation remains on track.”
Strategies for protecting value
Companies will pursue different strategies to protect value and seize opportunities in 2017. Many organisations will be defined as Arks, Sharks or Whales by their response.
Arks will be defensive and focus on core businesses and markets. They will shed non-performing assets, reverse unsuccessful mergers, cut costs and delay expansion. While particularly associated with the mining and oil and gas sectors due to the collapse in commodity prices, the Ark strategy also characterises retrenchment by retailers and re-shoring by manufacturers.
Sharks are less risk-averse and will hunt for opportunities in new activities and locations. Facing regulatory uncertainty and the rise of competing power centres in the emerging world, financial services is likely to take on risk to capture first-mover advantages in frontier markets or disruptive sectors such as fintech.
Whales will take advantage of their deep pockets and cheap financing to engineer mega-mergers and monopolise markets. Their main risks are economic nationalists and competition regulators. Consolidation strongly characterises the technology sector, pharmaceuticals and agribusiness, which have often arbitraged regulatory environments to gain dominant market positions.