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  • Hubert Edwards

A NEW PERSPECTIVE ON RISK MANAGEMENT

It's not new for risk management to take into account issues such as climate change and significant weather events such as Dorian or health incidents such as the Coronavirus. These are classic hazards which are normally seen as influencing operational risk as they impact physical and human resources, causes displacements and adversely impact normal operations of companies.


However, when these matters start to make a "bee line" to the base of the global economy and striking almost clinical blows to the foundation of global commerce, strategies and investments it's time to see them in the light of financial risk as opposed to the classic knock on effect. These event are akin to a charging wild beast going for the jugular of a prey. The effect can be fast, violent and brutal.


As we watch China grapple with this health incident, and other areas of the world, it is becoming clear that collectively the world may not be prepared for this. But look at the how it may impact vulnerable economies. One infected crew or passenger on a cruise ship will disrupt a normal port call removing anticipated revenue, impacting local business and reducing government revenue. Imagine therefore a broader scale state of infection affecting that entire industry. Countries like the Bahamas and those in the region could be addled.

The connectivity of the global financial systems cause one weaken market to have a contagion like effect on others. China challenges are impacting projections, consumer spending will change, restriction on the fluidity of movement amongst people will impact commerce, negotiations and planning will be delayed. The net effect is that the spill overs from one economy to the next will carry adverse results. Suppliers will see lower demand and capital will shift for safety. So the domino which is China (for the moment) has knocked the US financial markets seeing the DOW losing significant value in a short period. But Europe is also nervous and all the markets served by and consumed from by China is at risk.


The world financial markets operates on sentiments. Currently it is clear that all the governments in the active zones and elsewhere are seeking to control the narrative. But what if the development reaches a critical stage such that there is mo choice but to declare, officially, a pandemic? What would the response be? What sentiments would emerge and how would they impact the markets? The one thing which is sure is that none of the results will be positive.


And what of regions like the Caribbean? How will a Bahamas be impacted if there is a big impact on its main trading partner, the USA? Consider also in the wake of losing a significant portion of its economy as a result of a climatic event, the country is faced with a potential unexpected precipitous fall in global economic growth. It's a known fact that one of the important headwinds expected for 2020 is a slower growing world economy. Any significant shock could result in real problems for the Bahamas and other countries of the region. The stark reality is that while we have a lot to lose we may be also at significant weakness in detecting and containing the virus.


So the risk created by these events are way greater than their traditional classifications. These are in a serious way major financial risks not just to businesses but to countries! Multinational organisations will continue to feel the burn of the friction they cause. Cross border trade is being made unpredictable by their existence. Volatility in capital markets will shoot to higher levels not for the normal reason of basis risk or exchange rate or the usual all encompassing market risk but because event such as climate change and health pandemic is redefining how these risks ebb and flow. It's no longer your normal siloed and micro risk management focus. There are big massive macro exposures and how we prepare for these as countries, as a region and collectively on the global stage will determine how effectively we manage our ever present tenuous vulnerabilities. This is mainly because of the high level of interdependence and interconnectivities with the rest of the world that is present in our day to day national lives.


The spill over risk is real, the question is how prepared are we to manage same? The vulnerabilities are known, how will we hold up? The nature of risk has changed, operational risk has morphed into financial risks. China's success is ours. The USA success will be ours. The way the rest of the world manages this incident is important for us. Should they or any one fail, well the failure will be ours too. We look to our leaders of industries and countries to appreciate the risk and bring effective management to bear for the betterment of us all. We look to a deep understanding of managing risk at a country, regional level to help protect the continued well being of a people. It's time to see these risks differently, our lives depends on it.


Your thoughts?


#ThinkBeyondTheOrdinary #NextLevelSolutions



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