Risk Analysis and Growth Economies

Last week, DCFR hosted Professor Alyson Warhurst, CEO and founder of U.K.-based Maplecroft, a leading source of extra-financial risk intelligence. Warhurst focused on growth markets and oil and gas producing countries considered hotspots for 2013. Looking at both political, economic and societal risk, Maplecroft studies how risks conflict and interact with each other and how this impacts a countries’ risk profile in the future.

The Maplecroft lens is a useful way to assess risk and investment opportunities. Political risks can be described as “top-down” challenges, owing to conflict, security risks, and a lack of rule of law, which can often slow development. “Bottom-up” challenges are derived from societal risks; corruption and human rights issues are often indicators of future political risk, which foreshadows both financial and business risks. Reforms in Myanmar and China indicate that their current higher-risk environments will eventually become more amenable to foreign investment. Their political leaders allow for change, which ultimately facilitates more openness for trade and investment. However, in Myanmar, pitfalls remain and are tied to the uncertainty surrounding political reforms. Interestingly, numerous countries in Africa, Khazahkstan, Turkmenistan, Australia and others in Asia are displaying high growth patterns because of their integration with China. Much of this integration unsurprisingly shows patterns of natural resources trade.

Risks can be considered “global risks” that do not respect national boundaries— terrorism, pandemics, and natural disasters.  There are also cross-regional risks such as food scarcity and resource insecurity. Warhurst mentioned that analyzing how a country bounces back in the aftermath of a disaster is an indicator of their potential for future investment. Food insecurity is a major driver of social unrest. Numerous countries represent Maplecroft’s ‘falling stars’, countries that were on the rise, but back-peddled due to political or societal risks. Egypt, Tunisia and Algeria come to mind; Egypt and Vietnam are also troubling as leaders continue to crack down on dissent. Western supply chains are also said to be contracting in Vietnam.

There is a great need to invest in growth economies, suggested Warhurst. Massive growth in middle-class consumerism in African countries make it an ideal place for investment. But violence and extremism coupled with the potential for increased dissent among educated youths keeps several countries in the high-risk category, especially in the Middle East-North African (MENA) region. Four hundred million are expected to enter the global labor market, with the highest growth in MENA and Sub-Saharan Africa. Capitalizing on this growing labor market, however, can reduce and alleviate social unrest by providing opportunities.

By tracking different types of risks, it is possible to map which areas will be attractive markets twenty years from now. By understanding how these risks interact with one another, investment in emerging markets can be both possible and strategically advantageous.

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