Companies face new set of challenging risks in emerging markets

Companies chasing growth opportunities in emerging markets might be investing in countries that are more financially stable but they nevertheless pose new and different threats, a leading credit insurer has warned. France’s Coface stressed in a report that traditional risks facing foreign companies in emerging markets, such as debt default, are much less of a factor today. On the other hand, political instability, rampant protectionism and credit bubbles provide reasons for risk managers to be concerned, it added.

These new risks are the result of the continuing financial crises, the analysts said, but also of circumstances dictated by societies that are going through fast-moving changes.

In terms of social changes, the north African and Middle Eastern movements of 2011, as well as political protests in countries like Russia and labour strife in South Africa last year, have shown that a growing number of societies have become exasperated by political institutions that are unable to meet their aspirations, the report said.

Coface has devised a number of variables to estimate the risk of political instability and change in emerging markets, and has concluded that among the most threatened are Saudi Arabia, Iran, Venezuela, Algeria and Egypt, but also, to a lesser extent, Russia, Nigeria and China.

Other risks that can affect the activities of companies come in the form of capital controls, trade restrictions and protectionist measures.

The study claims that although capital controls have gained a coat of respectability since 2008, they can be used to artificially change the value of a currency, which can have repercussions in the strategies of multinational companies.

Countries like Venezuela have also implemented foreign exchange regimes that put hurdles on the ability of multinational companies to send profits back to their headquarters.

Some major economies, like China and Brazil, have restricted the issuance of licences to import certain products in a quest to protect local producers. Russia and Argentina have been singled out as the worst offenders when it comes to trade protectionism, although they are not the only culprits and such actions have been on the rise in the emerging world in recent years.

The third major risk companies face in emerging markets is the formation of credit bubbles, warns Coface.

The analysts concede that credit growth has been one of the reasons why emerging markets have been doing much better than the industrialised world of late, and also why they have become so attractive to multinational firms.

But they argue that credit bubbles can become a problem when credit is growing too fast as a ratio to GDP or other variables. Therefore, although bubbles are difficult to spot, companies should have them factored into their risk maps in some of the faster growing emerging markets.