Treasury Today Country Profiles in association with Citi

Are you aware of your country risk exposure?

Volcano erupting

Country risk has become a front and centre issue for many multinational companies, but very few actively monitor and manage this.

In recent years, country risk has been bubbling under the surface, flaring up every now and again in isolated markets. Then, in 2016, a concoction of regulatory, political, economic, security and social factors saw country risk erupt around the world.

For corporates, many of whom have embarked on global expansion over the past decade, often cited global economic uncertainty as one of their main challenges in 2017. “Some corporates are catching up and better understanding the risks they are exposed to in the markets that are material to their businesses,” says Shoaib Yaqub, Financing Solutions at Standard Chartered. “As a result, country risk is now front and centre of many treasury discussions.”

Evaluating the risk

Treasury professionals can be forgiven for not focusing too hard on country risk in the past. Indeed, with treasury resources already stretched in many companies, monitoring the risk posed by every country in which a multinational company operates in is simply too much of an ask.

Yaqub therefore advises that treasurers narrow their focus by analysing the business, discovering which markets are crucial to the company and then focusing on these. In some cases, some of these markets might be very low risk – Singapore and Hong Kong, to provide two examples – and in these instances close monitoring might not be necessary.

India and China, on the other hand, are two countries that have become key growth engines for many companies and they are considered to be relatively more volatile. It would therefore be prudent for treasurers to monitor these markets closely.

So once the treasury has ascertained which markets are crucial to the business and which of these are risky, it can begin to analyse and monitor its exposures.

Monitoring the exposures

It is here that corporates hit more difficulty, says Yaqub. “We get lots of questions asking what are the correct parameters to follow, what should corporates watch out for and how can the risk best be monitored,” he says.

To help its clients with this, the bank has developed a number of analytical tools. These tools enable treasurers to enter in information about their exposures and then analyse the risks based on real-time information from a variety of different data sources. “We are then able to provide various services such as early warning indicators that highlight when clients may need to take action to mitigate increasing country risk,” says Yaqub.

It is this active monitoring of country risk that Yaqub says corporates are trying to move towards. “Treasurers are then able to take this information and ensure that people within the business, including the board and senior management, are aware of what is happening and then make informed decisions,” he adds.

Taking action

The final step when managing country risk is using the information that you have acquired and then making decisions to mitigate any risk. This might be changing the treasury policy to account for the revised market conditions or perhaps the use of some new hedging instruments – we are still in an age when most corporates remain unhedged against country risk.

“There are various ways that we are helping clients to do this,” says Yaqub. “We have provided some with derivative instruments and others we have helped raise local funding so that they can limit net equity exposure in risky markets.”

The overriding message is that in this age of geopolitical uncertainty, corporate treasurers, at the very least, need to be proactively monitoring their country risk and ensuring that the business is shielded from any negative impact of black swan events.

Coface political risk assessment ratings

The French credit insurer has grouped every country in the world based on its political risk. Here is their risk assessment of some notable markets.

  • Philippines – very high political risk

  • Russia – very high political risk

  • India – high political risk

  • China – high political risk

  • UAE – Fairly high political risk

  • Indonesia – Fairly high political risk

  • Brazil – modest political risk

  • United States – modest political risk

  • UK – low political risk

  • Singapore – low political risk

  • Japan – very low political risk

  • Hong Kong – very low political risk