Global risks of doing business

by Bandula Dissanayake

It is important for every economy to realise the global risks of doing business. The World Economic Forum has been compiling the Global Risks Report (GRR) annually, since 2006, to address issues in a more meaningful manner, purely because every economy is interrelated to each other than ever before.

The GRR takes up major issues such as climate change, the upsurge of cyber dependency and income and wealth disparity, impacting many countries. The Global Risks Perception Survey was conducted with the help of over 750 experts from business, academia, civil society and the public sector.

The following have been recognised as the top five most impactful risks for the past three years, the failure of climate change mitigation and adaptation, weapons of mass destruction, water crises, large-scale involuntary migration and the severe energy price shock (increase or decrease).

Risks

As discussed in GRR 2016, private sector respondents of 140 countries identified their risks of the highest concern for doing business in the next 10 years. Over half of 140 economies identified the following as top concerns - unemployment and under-employment, energy price shocks, failure of national governance, fiscal crises, asset bubbles and cyber attacks.

Europe

Every region in the globe has its own outlook for its risks in doing business. Europe has concerns on fiscal crises, unemployment or under-employment, failure of financial mechanism or institution, energy price shock and energy prices.

Twenty-nine economies in Europe were taken into consideration and in 12 countries in Europe, unemployment or under-employment is considered the top most risk of doing business and is among the top five risks in 25 countries.

Cyprus, Greece, Italy, Portugal and Spain (South European economies) were seriously affected with the unemployment percentage reaching double digits and remaining so even after eight years of crisis. Iceland, Luxembourg, Norway, Sweden and the United Kingdom face risk of an 'asset bubble' and across Europe the risk of 'fiscal crises' is among the top five concerns. Cyber attacks are considered by Estonia, Germany, the Netherlands and Switzerland as their top most concerns.

North American region (USA and Canada)

Executives in the United States and Canada are most concerned about cyber-related risks and attacks along with the theft of data. This is due to many businesses being cyber dependent and 87 percent of the population in the US is connected to the internet and ranks as one of the top ranking countries for online business-to-consumer transactions. The threat of Islamic extremists is also a serious concern in the North American region.

Central Asia and Russia (comprising seven economies) worry about fiscal crises, unemployment, unmanageable inflation and interstate conflicts. In East Asia and the Pacific, in addition to energy prices, asset bubbles, and cyber attacks are considered the top most risks for businesses.

Central Asia is under pressure mainly due to the economic slow down in Russia, weaker growth in China and slow recovery in the Eurozone. Rising public debt will tell the actual story of the region which is more vulnerable to a fiscal crisis. Unemployment is also likely to affect the region.

East Asia and the Pacific

Mainly economic related facts such as energy price shock and asset bubble are of serious concern in the region which comprise 17 economies. These countries are mainly energy importers and energy prices will affect the regional economy in a considerable way.

Australia, Cambodia, China, Hong Kong SAR, Myanmar, New Zealand and Thailand are saddled with the risk of an asset bubble. The recent equity market issues faced by China and potential spillover of that effect to other regional countries and over valuation of property assets in countries such as Hong Kong and Sydney, in Australia also may have an adverse impact on the region. Many of the Pacific countries show concern over natural calamities such as earthquakes, tsunamis, volcanic eruptions and geomagnetic storms causing threats to the business environment.

South Asia

Even in South Asia which comprises six countries (Bangladesh, Bhutan, India, Nepal, Pakistan and Sri Lanka) business leaders worry about energy prices, fiscal crises, unemployment or under-employment which could lead to a challenging situation. The current unstable political situation is also a concern in South Asia. Nepal ranks 126th and Bangladesh 145th out of 175 economies on the Corruption Perception Index.

Latin America and the Caribbean

In 22 economies in the region, failure of national governance, energy price shock, unemployment or underemployment, profound social instability and fiscal crises have become the top most risks for doing business. There is also the risk of failure of critical infrastructure and experts believe that increasing investments on infrastructure facilities would stimulate the economy in the region.

Middle East and North Africa

Fourteen economies responding to GRR identify unemployment and underemployment, energy price shock, fiscal crises, terrorist attacks, asset bubble, inter-State conflict as top most concerns for the region.

In many oil exporting countries, low energy prices are creating issues for exports and revenue and public finances, pressurising policy makers to look at other options. The humanitarian crises faced by the region mainly due to Syrian refugees living in neighbouring countries causing severe issues for those economies.

As per GRR 2016, the IMF says that over 10 million people will be looking for work by 2020 in the region's oil-exporting countries, which may create an unfavourable situation for fiscal sustainability on the medium term, and will even impact on social stability in these countries.

In Sub-Saharan Africa, the business community's top concerns include unemployment, energy prices, the failure of national governance and the failure of critical infrastructure.

Six key global risks

Of the 140 economies revised under GRR, 41 countries identify 'Unemployment or under-employment' as the top most risk for business. For 29 countries it is 'Energy price shock' as their top most concern and 'Failure of national governance' is the highest concern for 14 economies. Eleven countries consider 'Asset bubble' as the number one threat while 10 countries consider 'Fiscal crises' as the top most concern. Eight economies out of 140 say their concern is 'Cyber-attack'.

Unemployment or under-employment

The impact of unemployment or under-employment is heavy for business which in turn affects economic growth and threatens social stability. There is a growing mismatch between the skills demanded by a fast-changing job market and those with unemployed workers.

It is an eternal problem and businesses struggle to recruit suitable workers. It is projected that by 2020 nearly half of all current jobs could be affected by advances in robotics and automation of industries.

Energy price shocks

Price shocks mean sudden increases or decreases in the price of energy in the form of electricity, oil, natural gas or liquid fuel. The prevailing low oil prices have resulted in significant shifts of wealth from oil and gas producers to consumers, meaning lower input costs for industry, lower inflation and more money available to spend in other sectors. Due to low investments in the oil and gas sector, the risk of rising unemployment cannot be evaded. This sector is expected to cut down at least USD 200 billion on capital expenditure which will result in adverse effects.

Failure of national governance

The risk of failure of National Governance more fully described in GRR is the inability to efficiently govern a nation, which shows factors such as weak rule of law, corruption, illicit trade, organised crime, impunity, and political deadlock.

A weak national government is not the result only of poor governance. Governance is a multi-faceted phenomenon in which business, civil society and the public also play important roles. Failure of national governance may create space for organised criminals, terrorism, illegal trading of humans and weapons. Businesses face additional risks and costs from operating in countries affected by poor governance. It will have a serious impact not only in the country but also on the region and the globe.

Asset bubble

It can be described as unsustainably overpriced assets such as commodities, housing and shares, in a major economy or region. Equity bubbles also often erupt as a result of low interest rates, and would give the stock market an inflated outlook and most corporates may get into a nonviable business ventures that may damage businesses in the long run. Real estate and Government bond bubbles may lead to unfavourable fiscal situations in economies.

Cyber-attacks

From individual monies to commercial operations and nationwide infrastructure public and private services are ever more managed via computer networks and are, therefore, vulnerable to attacks. In one of the international studies carried out by McAfee, it is estimated that cyber crimes costs the world economy approximately US$ 445 billion.

Eight economies in the globe such as Estonia, Germany, Japan, Malaysia, the Netherlands, Singapore, Switzerland, and the United States consider cyber attacks as the number one threat for their economies.

GRR is identifying Global Risk of Highest Concern for Doing Business by Country and Sri Lanka is categorised as having a possible risk of Energy Price Shock.

As per the GRR 2016, geopolitical and international security risks are also considered seriously by executives and world leaders. It is difficult to quantify the impact of war, but estimates suggest that in 2014, around 180,000 people were killed in 42 armed conflicts around the world.

Indirect deaths and costs caused by war-related malnutrition, displacement, disturbance, disease and preventable illnesses has increased. Deaths due to terrorism are also on the rise, accounting for over 32,000 deaths in 2014 in 93 countries.

Many of the EU countries face an unprecedented situation due to the large number of refugees moving into the EU countries.

Tackling global risks is beyond the capacity of individual businesses and it clearly lies in a collaborated environment of private sector government stake holders.

The writer is the Secretary General and CEO of the National Chamber of Commerce of Sri Lanka.

Reference: Global Risk Report 2016