Risks of doing business and the world economy

It is extremely important for each and every economy to realize the global risks of doing business. The World Economic Forum has been compiling the Global Risks Report (GRR) annually since 2006 with the intension of recognizing the challenges that the economies in the world are collectively facing, in order that economies may be able to address the issues in a more meaningful manner, purely because every economy is interrelated than ever before.  

The GRR explores the evolving major trends, mainly identified as climate change, the upsurge of cyber dependency and income and wealth disparity, already impacting many countries. The Global Risks Perception Survey was conducted with the contribution of more than 750 experts drawn from business, academia, civil society and the public sector. The following had been recognized as the top five most impactful risks for the past three years, namely the failure of climate change mitigation and adaptation, weapons of mass destruction, water crises, large-scale involuntary migration and severe energy price shock (increase or decrease).

Risks to doing business 
As discussed in GRR 2016, private sector respondents of 140 countries identify their risks of highest concern for doing business in the next 10 years. More than half of 140 economies identify the following as top concerns - unemployment and underemployment, 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 as given below. Europe has concerns on fiscal crises, unemployment or underemployment, 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 underemployment is considered as the top most risk of doing business and is among the top five risks in 25 countries.  Cyprus, Greece, Italy, Portugal and Spain (Southern European economies) were seriously affected with unemployment percentage reaching double digit and remain as it is even after eight years of crisis. Iceland, Luxembourg, Norway, Sweden, the United Kingdom are facing risk of an ‘asset bubble’ where across Europe the risk of ‘fiscal crises’ being among 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 theft of data. This situation has provoked due to many businesses are cyber dependent and as much as 87 percent of the population in the US is connected on Internet and ranks 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 (comprised of seven economies) worry about fiscal crises, unemployment, unmanageable inflation and interstate conflicts. In East Asia and the Pacific, in addition to the energy prices, asset bubbles and cyber-attacks are considered the top most risks for businesses.

 
The Central Asia is under pressure mainly due to economic slowdown in Russia, weaker growth in China and slow recovery in Eurozone. Rising public debt will tell the actual story of the region, which is more vulnerable for 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 considered to be of serious concern in the region, which comprises of 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 the other regional countries and over valuation of property assets in countries like Hong Kong and Sydney also may have had 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 of six countries (Bangladesh, Bhutan, India, Nepal, Pakistan and Sri Lanka), the business leaders are worried about energy prices, fiscal crises, unemployment or underemployment, which the entire region could be headed to a challenging situation. Failure of national governance is also a leading concern in South Asia stressing the complications posed for business in the region by the current unstable political situations. For example, Nepal ranks 126th and Bangladesh 145th out of 175 economies on 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. Additionally, there is a risk of failure of critical infrastructure and experts believe that increasing investments on infrastructure would stimulate the economy in the region. 

Middle East and North Africa
Fourteen economies responding to GRR identify: unemployment/underemployment, energy price shock, fiscal crises, terrorist attacks, asset bubble and interstate conflict as top most concerns for the region. Many of these oil exporting countries show apprehension on energy price shock with low prices already creating issues for exports and revenue and public finances pressurizing the policymakers to look at other options of diversification.  

The humanitarian crises faced by the region mainly due to Sirian refugees living in neighbouring countries causing severe issues for those economies. As per the GRR 2016, the International Monetary Fund (IMF) predicts that more than 10 million people will be looking for work by 2020 in the region’s oil-exporting countries, which creates an unfavourable situation for fiscal sustainability on the medium term, and even will have an impact on the social stability in these countries.  

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

Six key global risks 
Out of 140 economies revised under the GRR, 41 countries identify “unemployment or underemployment” as the top most risk for business. Twenty-nine countries say “energy price shock” as their top most concern and “failure of national governance” is highest concern for 14 economies. Eleven countries consider “asset bubble” as the number one threat for them, whilst 10 countries consider “fiscal crises” as the top most concern. Eight economies, out of 140, say their concern is “cyber-attack” for the businesses.

Unemployment or underemployment
The impact of unemployment or underemployment is heavy for the business which in turn affects the economic growth and threatening social stability. There is a growing mismatch between the skills demanded by a fast-changing job market and those possessed by unemployed workers. It is an eternal problem that businesses are struggling to recruit workers who are inadequately prepared with less skills. Presently it is projected that by 2020, nearly half of all current jobs could be affected by the advances in robotics and automation of industries.  

Energy price shocks to the global economy
Price shocks means sudden increases or decreases in the price of energy in the form of electricity, oil, natural gas or liquid fuels. 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 investment taking place in oil and gas sector, the risk of rising unemployment cannot be evaded. It is noted that this sector is expected to cut down at least US $ 200 billion on capital expenditures on new projects, which will bring adverse effects.  

Failure of national governance
Risk of failure of national governance, more fully described in the GRR as inability to efficiently govern a nation, shows factors such as weak rule of law, corruption, illicit trade, organised crime, impunity and political deadlock. 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 lead to create space for organised criminals, terrorism, illegal trading of humans, weapons, etc. It is unavoidable that businesses face additional risks as well as costs from operating in countries affected by poor governance. It will have a serious impact not only in the country’s economy but also on the region and the globe. 

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

Cyber-attacks
From individual monies to commercial operations and nationwide infrastructure, both public and private services are evermore managed via computer networks and are therefore vulnerable to be attacked. In one of the international studies carried out by McAfee, it is estimated that cybercrimes indeed cost the world economy approximately US $ 445 billion. Eight economies in the globe namely Estonia, Germany, Japan, Malaysia, the Netherlands, Singapore, Switzerland and the United States consider the cyber-attacks as the number one threat for their economies.  The GRR is identifying global risk of highest concern for doing business by country and Sri Lanka is categorized 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, leaders in the world. 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, displacements, disturbance, disease and preventable illnesses raised to higher figures. Deaths caused from terrorism are also on the rise, amounting to more than 32,000 in 2014 in 93 countries. Further, many of the European Union (EU) countries are facing an unprecedented situation by large numbers of refugees moving into the EU countries, where it is becoming unviable for the region. It is noteworthy that tackling global risks is beyond the capacity of individual businesses and it clearly lies in a collaborated environment of both private sector stakeholders and government stakeholders.

(Reference Global Risk Report 2016)
(Bandula Dissanayake is Secretary General/CEO of the National Chamber of Commerce of Sri Lanka)