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Learn The Importance Of Risk In Business

Political risk is one that affects the economic interests of companies, as a result of changes or the lack of political stability in a country or region. From that point of view, any place in the world presents a greater or lesser political risk. Differentiating between micro-risk and political macro-risk is vital. When assessing and weighing the consequences of possible political disruption, it is convenient to differentiate between macro-risk and political micro-risk.

Photo: Unsplash

The first refers to those changes that affect all companies and commercial and industrial networks that operate in a given country. This may be due, for example, to widespread expropriations of foreign companies or armed conflicts. The second, however, includes those decisions or events that harm a specific company or industrial sector. Corruption or specific political decision-making are some typical examples. Political risk depending on the scope of the investment is major. On the other hand, the level of activity and involvement in the regional economic fabric that a company assumes also determines the degree of political risk that is being assumed. Learning about the economy is vital in order to learn more about your business. Education is power, and therefore you should look at fx currency pairs on Pepperstone platform

There are 3 categories in risk assessment, that are usually differentiated by:

  • Commercial political risk.
  • Political risk over international licenses for technology and intellectual property.
  • Political risk from direct investment abroad.

Its name explains by itself the scope of this type of risk, being the risk of commercial exchange the one that usually entails a more moderate economic damage, and investment in foreign territory the one that can have the greatest impact on the balance sheet of a company.  Obviously, the nature of the economic activity of each company, as well as its investment capacity will influence the type of risk that it is willing to assume. Every business comes with risk, and even more so in these uncertain times. 

How Political Risk Affects Businesses

Political risk has repercussions on a wide variety of areas of business and international business activity. These can range from the increase in operating costs, the concurrence of commercial losses or even the closure of facilities.

Supply chain

The absence of political stability can also affect the supply chain. Today, companies rely on components and raw materials from multiple countries, the transportation of which may involve crossing multiple borders. Any event or political decision that interferes with the flow of the supply chain can seriously affect an international business. The 2014 invasion of Ukraine and subsequent Russian annexation of Crimea affected hundreds of companies directly or indirectly. These are things that bigger businesses can learn from, especially if they operate or collaborate with overseas partners. 

Deterioration of corporate reputation

Those less stable countries are also more susceptible to issues such as corruption or deterioration of the working conditions of local workers. This poses a considerable risk to the reputation and brand image of those companies that are affected by the publication of these phenomena.

Hyperinflation and fluctuations in currency exchange

The volatility in the exchange rate of the currency or currency used in a certain country also directly affects the income statement of a company. However, fluctuations can be due to many reasons. In some cases, political corruption generates a chain reaction in the stock markets, causing the local currency to devalue against that used in the country of the foreign company. On other occasions, excessive inflation and the lack of control by the local financial market regulators make it impossible to make a reliable calculation of the results of a given year, after applying the corresponding exchange rate.

Non-payments of credits granted to local clients

Outstanding accounts by importers or companies that have contracted services from foreign suppliers could also be unpaid as a result of political changes, or the country's deficient judicial structure. Legislative changes, the prohibition to issue transfers abroad or repatriate capital, or the lack of impartiality on the part of the judicial authorities in the face of lawsuits filed by foreign entities may prevent the balance of outstanding credits.

Photo: Unsplash

How to prevent and reduce political risk

Before starting business relationships in another country, it is essential to adopt a series of preventive measures. In the first place, an analysis of the risks that said economic activity implies must be carried out, in order to determine the damage that may be suffered in the event that the operations do not come to fruition. Correct planning implies knowing in depth the details of the domestic legal and political environment, as well as the country's relationship with the rest of the states around it. Political, ethnic or religious conflicts, border disputes, or the lack of recognition of the main international norms should set off alarms.

Low effectiveness of legal agreements

In some cases, recipient countries offer to sign contracts that establish compensation conditions with the company in question, when their commercial operations are interrupted by consequences derived from political risk. Unfortunately, these types of agreements are unreliable, since one of the main political risks is a direct result of the lack of legal certainty and the high probability of default by subsequent governments.

Hiring political risk credit insurance

One of the most effective ways to minimize the political risk of commercial activities abroad is to take out insurance that covers these types of aspects, and allows obtaining financial compensation for the damage caused by the forced interruption of activities and non-payment of pending credits. In addition, credit insurance also includes access to monitoring and analysis services for clients' risk and operations to be carried out, which makes them an excellent prevention mechanism. In an environment of growing and necessary internationalization of our companies, it is essential to adopt a prudent attitude and protect ourselves against those decisions and political changes that are beyond our control.

Photo: Unsplash

We trust that this information helps to strengthen the future of your business operations abroad in this difficult Covid-19 times. There is no greater burden than the worry of change within your business that is linked to social and economic crises. 

Using Covid-19 to gauge where business may lead

Managing the volatility of the COVID-19 era, with diversified and global investment

The second wave of COVID-19 has shown that volatility will continue to characterize markets for a long season. In a recent analysis of the themes that have been a trend in the past year, he highlights that:

  1. The technology sector will continue to grow, thanks to the search for solutions to the problems that constantly arise in our society, as the coronavirus has exemplified.

  2. Sustainability has acquired a specific weight in the assessment of business results, and has become an essential factor.

Actual trends

Buyers are looking for companies and interacting with them more than a month ago. People must stay at home and businesses are closed, so many transactions must be completed virtually. However, the volume of business creation has decreased and this decrease will affect the sales forecasts of most organizations. Some external factors, such as budgets and specific changes in certain industries due to the coronavirus, will inevitably affect sales cycles. However, according to our data, companies have the opportunity to attract interested customers and interact with them. 

The crisis generated by the global Covid-19 pandemic is already a reality in Latin America , its spread and measures to contain contagion are causing unprecedented disruption in markets and businesses. Companies must respond and accelerate their contingency plans, thinking that the actions and decisions taken today can definitely change the course of the business. Faced with a global emergency, which generates such volatility and uncertainty in the markets, it is important for businesses to be proactive in assessing their capabilities to cope with disruption from an operational and financial point of view.

The main challenges companies are facing, which are causing the most disruption, include: quarantined work teams, supply chain failures, lost / depleted inventories and sudden drops in demand for products and services. The business conditions of some companies are presenting challenges, therefore it is important to anticipate that this situation could put unexpected pressure on working capital and business liquidity. Businesses cannot allow themselves to lose their capital due to the pandemic, there must be a way to control the negative impacts.

Therefore, the decisions and measures applied to contain the crisis may have a positive or negative impact both in this period of contraction and in the subsequent phase of recovery and growth.

What actions can the company take to manage the crisis?

We have identified a series of key actions or steps that the company can implement to face the challenges posed by cash management and liquidity management in the face of the pandemic we are experiencing.  

Therefore the goal is to focus on the new, sustain the future, and to offset any issues that have occurred over the past twelve months. The possibility is strong but education is the biggest power for all. 

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