The hidden risk in emerging market


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The hidden risk in emerging market

  1. 1. The Hidden Risks in Emerging Market 1091200541 PantehaAkbariKhadem 1091200020 Hassan Bihamta 1091200499 IlyasZhantureyev 1091200247 Rita Amina 1091200493 Sedigheh Tavakkoli
  2. 2. Foreign companies Investing abroad Beneficiaries Shareholders Citizens of the host country The Hidden Risks in Emerging Market
  3. 3. Type of Risks Elections and other political events Economic crises changing societal attitudes The Hidden Risks in Emerging Market
  4. 4. Governments policy Taxation M&A Financial regulationsThe Hidden Risks in Emerging Market
  5. 5. Risks in Traditional Investment The biggest risks faced by foreign investors in developing countries  Volatile political systems Expropriation risk The Hidden Risks in Emerging Market
  6. 6. 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 Market
  7. 7. Prevention Must develop proactive political-management strategies The Hidden Risks in Emerging Market
  8. 8. What is the Policy Risk ?Firms engaged in international business have policy risk including:  Fuel supplies.  Exchange rates. Currency conversions. The Hidden Risks in Emerging Market
  9. 9. 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 governments own tax payment. The Hidden Risks in Emerging Market
  10. 10. 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. The Hidden Risks in Emerging Market
  11. 11. Why hedging against policy risk is difficultInsurance 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 Hidden Risks in Emerging Market
  12. 12.  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 Hidden Risks in Emerging Market
  13. 13. 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 The Hidden Risks in Emerging Market
  14. 14. 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] The Hidden Risks in Emerging Market
  15. 15. 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 governments helping hand The Hidden Risks in Emerging Market
  16. 16.  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 The Hidden Risks in Emerging Market
  17. 17. 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 The Hidden Risks in Emerging Market
  18. 18.  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 coalitio of interests The Hidden Risks in Emerging Market
  19. 19. To political analysis managers have consulted: Employees Local business partners Supply chain partners …… The Hidden Risks in Emerging Market
  20. 20. 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 The Hidden Risks in Emerging Market
  21. 21.  Non-Business Organizations TO • Anticipate concerns about environmental, health and safety issues Professional Experts Such • Ex-Government officials operating as: • Economist intelligence unit • Stanford, Oxford analytics • Political Risk Services The Hidden Risks in Emerging Market
  22. 22. 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 The Hidden Risks in Emerging Market
  23. 23. Information-Extraction Software Data Mining: Relies on the coincident location of wordsNatural Language Parsing(NLP):Facilitates more refined sentence-levelinferences by syntactically distinguishing amongsubjects, verbs, and objects The Hidden Risks in Emerging Market
  24. 24. 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 Hidden Risks in Emerging Market
  25. 25. 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 The Hidden Risks in Emerging Market
  26. 26. War roomMethod;Brainstorming sessionsInfluence map “Influence maps” are used to depict each politicallyrelevant actor as a bubble arrayed in space according to theplayer’s position on a given issue, with the size of thebubble 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 Hidden Risks in Emerging Market
  27. 27. 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 maximizes his, her, or its expected utility in each period. The Hidden Risks in Emerging Market
  28. 28. 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. 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 Hidden Risks in Emerging Market
  29. 29. Models are used by the intelligence community and byspecialist consulting groups such asMesquita&Roundell, Sentia Group, the Probity Group, andCommetrix.Analysts; Identified which actors were most commonly cited in thepress and referenced in their speeches and writings.Constructed a network of key “influencers” and modeledvarious points of entry into this system to identify the targetareas and the messages that would maximize their effect onthe climate change debate. The Hidden Risks in Emerging Market
  30. 30. 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 “tummy tests Defensible system & toward an for managingTraditional approaches analytically orientedThis system will retain elements of tacit knowledge and experience& should be powerful source of competitive advantage The Hidden Risks in Emerging Market