The hidden risk in emerging market

The Hidden Risks in Emerging Market

1091200541 Panteha Akbari Khadem 1091200020 Hassan Bihamta1091200499 Ilyas Zhantureyev1091200247 Rita Amina 1091200493 Sedigheh Tavakkoli


Foreign companies

Investing abroad

Beneficiaries

Shareholders

Citizens of the host country


Type of Risks

Elections and other political events

Economic crises

changing societal attitudes


Governments policy


Risks in Traditional Investment

The biggest risks faced by foreign investors in developing

countries

Volatile political systems

Expropriation risk

What is the policy risk?


The risk that a government will discriminatorily change the laws,

regulations, or contracts governing an investment—or will fail to

enforce them—in a way that reduces an investor’s financial returns

is what we call “policy risk.”

The Hidden Risks in Emerging MarketThe Hidden Risks in Emerging Market

Prevention

Must develop proactive political-management strategies


What is the Policy Risk ?

Firms engaged in international business have policy risk including:

Fuel supplies. Exchange rates. Currency conversions.


Reasons to Failure AES Corporation

Public official’s inaction to Terminated supply to non paying industrial consumers

Public official’s inaction to supply fuel to AES.

Public official’s demand for government's own tax payment.


Ways to protect policy risk and currency or

price swings.

Use of legal contracts. Use of insurance. Trade in financial instruments

Use of risk-mitigation strategies.


Why hedging against policy risk is difficult

Insurance offers limited protection against policy risk: Since insurance protection is related to

firm’s ability to manage the policy-

making process. Insurance offer short-term coverage or

don’t offer any coverage at all.


The project and the nature of policy risk Conventional hedging strategies are infeasible.

Average risk premium instrument in a given country offers a false comfort

No financial institutions have not used premium to pay out money when a policy risk is realized.


THE NEW RISK — MANAGEMENT PLAYBOOK

Constructing hedges against policy risk through contracts, insurance or financial risk — management tools

Rewriting the playbook

Improve operation Quick cost — benefit analyses Political pressure


INVESTING IN GOODWILL

Managers spend a great deal of time and energy on improveing efficiency

It was struggling with poorly maintained equipment that had detriorated before privatization

A smarter approach was used by Italian state — owned oil company Eni

CEO, Franco Bernabe visited Rio de Janeiro to announce a $500 million investment. He proclaimed : '' Now is the time to show that Petrobras [ the state — owned oil company] has long — term friends]''


FRAMING THE DEBATE

Firms need to master the art of political spin.

Presenting a venture as «fair»,equitable», or «growth enhancing»

Dominant firms appeal to '' fairness'' by arguing that smaller entrants cannot survive without the government's helping hand


LG Telecom — the third entrant, behind the much larger SK Telekom and Korea Telecom — made repeated calls for '' asymmetric'' government regulation of the market leaders in order to '' level the playing field''

The Korea Times reported, '' The defining question is whether the government will back new entrants in the name of encouraging fair competition, or limit the pool to experienced players''

May 2001 the South Korean government announced that it would '' guarantee a market share of at least 20% for third major telecom operator through asymmetric regulation on Korea Telecom and SK Telecom''


FINDING POLITICAL PRESSURE POINTS

The network of relationships in a society greatly influence policy outcomes, especially in countries with weak legal systems

International investors must identify and engage local politicians' power bases


Eni has shown the way, this time in Kazakhstan. Through its subsidiary Agip KCO

Conducts knowledge — transfer, training, develop seminars

At least 60% of local employees are Kazakh citizens

Constraction of various publick works

Crucial component of an effective strategy is to assemble a coalition of interests


To political analysis managers have consulted:

Employees Local business partners Supply chain partners ……


Information gathering

It’s different ways to gather information Varies in intensity and structure Radio Newspapers Conversing with locals And different method to use in computerized systems: Delphi


Non-Business Organizations

• Anticipate concerns about environmental, health and safety issues

Professional Experts

• Ex-Government officials operating• Economist intelligence unit • Stanford, Oxford analytics• Political Risk Services

TO

Such as:


Multiple real-time indicators and metrics

CEOs and board of directors demand real-time data This human intelligence effectively incorporate into

enterprise risk-management models and frameworks


Information-Extraction Software

Data Mining: Relies on the coincident location of wordsNatural Language Parsing(NLP):Facilitates more refined sentence-level inferences by syntactically distinguishing among subjects, verbs, and objects


Why Country risk Rating Don’t Work

Level of policy risk vary among investors in a country

Country risk rating usually reflecting pas policies out-comes


The “Tummy Test” and Other Models

Speak about relevant sources by decision makers Draws upon their own knowledge of similar cases Make an educated guess about the likely policy outcome.

Necessities Skill set of the decision maker The relevance of past experience to the current situation. Involving specialized consultancies


War room

Method;Brainstorming sessionsInfluence map “Influence maps” are used to depict each politically relevant actor as a bubble arrayed in space according to the player’s position on a given issue, with the size of the bubble proportional to the player’s power. What happens if we target actor X? What if we break the link between X and Y? What if we try to reduce Z’s power?


The dynamic expected utility model based on game theory. Every actor with a vested interest in an issue has a choice of

proposing a policy, opposing a proposed policy, or doing nothing.to maximizes his, her, or its expected utility in each period.


The sensitivity of the outcome to various assumptions and parameters can then be calculated, helping to identify which actors are so pivotal that a change in their preferences, power, or salience would have a large impact on policy.

The selection depends on

The direction and intensity of the actor’s preferences, The salience of the issue, The cost of proposing or opposing a policy, Similar information about other actors.


Models are used by the intelligence community and by specialist consulting groups such as Mesquita & Roundell, Sentia Group, the Probity Group, and Commetrix.

Analysts; Identified which actors were most commonly cited in the press and referenced in their speeches and writings. Constructed a network of key “influencers” and modeled various points of entry into this system to identify the target areas and the messages that would maximize their effect on the climate change debate.


The risks of investment may be great to justify entry into certain political zones ,but by

Recognize the dynamism of the environment Implement appropriate strategies to address the risks quite manageable.

Combining data-mining&

Traditional approaches

Defensible system for managing

“tummy tests toward an

analytically oriented

This system will retain elements of tacit knowledge and experience & should be powerful source of competitive advantage