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Rise in geopolitical threats worries business leaders

Brexit, trade wars, and political unrest are increasingly leaving their marks on global business, surveys suggest.
 A worker inspects imported cars at a port in Qingdao, Shandong province, China.
A worker inspects imported cars at a port in Qingdao, Shandong province, China.

CEOs worldwide are a lot less optimistic about economic growth than they were a year ago, partly because they worry that rising geopolitical and geo-economic risks will take their toll on business revenue over the next three years, research by PwC suggests.

Of nearly 1,400 CEOs PwC surveyed across the globe, 29% said they believe global growth will decline in 2019, up from 5% the year before. The number of respondents who were confident their companies’ revenue would improve over the next three years dropped to 36%, from 45% in 2018 and 51% in 2017.

Optimism dropped most sharply amongst CEOs in North America, from 63% in 2018 to 37% in 2019. CEOs in Asia Pacific remain the most optimistic about global economic growth.

The survey also found that views about top threats have changed to being less existential and more related to the ease of doing business. The top ten risk factors on respondents’ minds this year are:

  1. Over-regulation.
  2. Policy uncertainty.
  3. Availability of key skills.
  4. Trade conflicts.
  5. Cyber threats.
  6. Geopolitical uncertainty.
  7. Protectionism.
  8. Populism.
  9. Speed of technological change.
  10. Exchange rate volatility.

Risks that dropped out of the top ten list in the past year were terrorism, climate change and environmental damage, and increasing tax burden.

The impact of rising geopolitical and geo-economic risks is also highlighted in a 2019 global risk management survey by British insurance company Aon. Respondents ranked economic slowdown as their top concern in 2019. Erratic trade policies, large-scale geopolitical conflicts, and frequent financial market turmoil in the past two years pushed concerns about accelerated rates of change in market factors into third place, from 38th in 2017. And concerns about distribution or supply chain failure moved up seven spots into 12th place.

“Nations tend to protect their economy and local industries by instituting trade restrictions and import tariffs,” said Oluseyi Olanrewaju, FCMA, CGMA, the CFO of the Africa business of British multinational telecommunications company Vodafone. Nigeria, for example, he said, put off signing the framework agreement for establishing the African Continental Free Trade Area (ACFTA) following protests by large domestic labour unions concerned the deal would negatively affect the local economy.

Strategic adjustments

The shift in risks is prompting adjustments in business strategies, according to the PwC survey. Two-thirds of CEOs who are extremely concerned about trade conflicts are taking a fresh look at their supply chains and alternative markets and delaying foreign direct investments and capital expenditures.

For example, India is enjoying increasing popularity as an investment market, while the US has become less attractive, particularly amongst CEOs in China. The number of Chinese CEOs who consider the US as their top market plummeted to 17%, down from 59% in 2018.

CEOs are also adjusting activities to drive revenue growth. Overall, 77% said they focus on operational efficiencies and 71% on organic growth. Fewer than half said they plan to launch new strategic alliances, enter new markets, pursue mergers and acquisitions, or collaborate with startups.

Internal initiatives to improve operational efficiencies are particularly popular amongst CEOs in Africa and Western Europe.

Rapid technological changes and competitors charging less for comparable services are the business threats that worry Olanrewaju the most. Tariffs that raise the price of imports and regulatory restrictions that erect barriers to entry in offshore markets also play a role.

“As a response, we focus on the local market and strive to increase our market share,” he said. That includes institutionalised quality control and service delivery, domestic sourcing and renegotiation of foreign contracts, and a push to increase market share through product innovation and diversification.

Rising geopolitical and geo-economic risks

A rise in isolationist and protectionist sentiments and political tensions has triggered tariff tit-for-tats, economic sanctions, and the uncertainties surrounding Britain’s plan to exit the EU. In 2019, these geopolitical and geo-economic risks are expected to increasingly affect businesses by threatening economic slowdowns and disruptions to supply chains, according to a report by insurance broking and risk management firm Marsh.

The report highlights the following geopolitical and geo-economic risks by region:

North America. Following the longest shutdown of the US government at the beginning of the year, domestic politics in the US are expected to become more combative. A divided Congress is likely to hold up policy formation and enactment. Trade tariffs could escalate. Bilateral relations with Russia are unlikely to improve.

Europe. Uncertainties about Brexit and how it will affect supply chains and labour mobility continue. Elections in multiple European countries are expected to cause transitions. The EU could face a leadership vacuum in a key member nation if German Chancellor Angela Merkel steps down early.

Latin America. Political risks have improved in several Latin America countries, including Guatemala, Chile, and Paraguay. The situation in Venezuela, however, is expected to remain volatile, with inflation expected to reach 10 million per cent.

Africa. Political risks improved considerably as new political leadership ended public protests in South Africa, a peace deal materialised in Sudan, and the likelihood of a peace deal with rebels increased in Mozambique. However, social tensions and unrest rose in Zambia, Mali, Algeria, Tunisia, Cameroon, and the Central African Republic.

Middle East. The ongoing conflict in Syria could raise tensions between Russia and the US. Following the US withdrawal from the Iran nuclear deal and re-imposition of US sanctions on Iran, the US could increase pressure on Iran and raise the possibility of a military confrontation. That could disrupt global oil supplies.

Asia Pacific. Border tensions between North and South Korea are expected to decrease. Tensions between China and the US over tariffs, human rights, and technology transfers continue. Also, China’s economic growth is expected to slow below 6%.

— Dan Holly is a freelance writer based in the US. Sabine Vollmer is an FM magazine senior editor. To comment on this article or to suggest an idea for another article, contact her at Sabine.Vollmer@aicpa-cima.com.