Managing risk in emerging markets

Firms must become more proactive in managing emerging-market risk amid increasing global volatility

October 20, 2016

2 mins

Corporate, commercial & institutional bankingEconomy and trade

Firms must become more proactive in managing emerging-market risk amid increasing global volatility

Emerging markets have always required a different approach to doing business. Their market infrastructure is often less established, and many face significant geopolitical risks. However, today’s global economic headwinds are making these challenges more pronounced, requiring companies to change tack.

When multinationals first entered heavily commodity-dependent emerging markets, such as Nigeria, many made strong profits and hedging their risks was not a priority.

Today, by contrast – amid high levels of volatility and fast-changing regulations – firms must be more pro-active than ever in managing the most urgent risks, such as foreign exchange, regulator, operational, credit and supply chain volatility.

Take a global approach

Each emerging market is developing at a different pace. For example, some have characteristics of developed economies, with liberalised foreign exchange regimes for current account hedging, but their capital account may be opening more slowly. Corporate treasurers need to stay abreast of these changes to make the most of them.

This should not result in a fragmented approach, however, by taking a global approach based on realistic insights into each geography, treasurers will be better able to manage risk across the enterprise.

Our report recommends reviewing foreign exchange risk policies on an ongoing basis, rather than annually or another defined interval. And, where feasible, that the policy considers the use of hedging instruments that are particularly designed to manage higher currency volatility, such as currency options.

Managing challenges

To better manage credit challenges, we recommend centralising credit and collection monitoring wherever possible. This will help build a global risk picture and establish common processes and controls.

From a supply chain perspective, consider where delays in the financial supply chain currently occur, and how these could be resolved, such as financing a distributor’s working capital needs, or introducing more efficient payment and collection methods.

With growth prospects in developed markets such as Europe and North America, lackluster, multinationals are continuing to look to emerging markets for opportunities. But to make the most of these, companies will need to find new ways of managing risk.

Our report, ‘Managing risk in emerging markets’, offers companies currently conducting business in emerging markets, or seeking to do so, tips and advice. Download a copy here.