Following a year of economic turmoil and political tensions, Nathan Skinner highlights the global issues that will be on the world's risk register in 2010
Assessing the future global risk landscape is not easy. Any prediction is at best an educated guess. One of the best approaches, and the one adopted here, is to look backwards for clues about emerging trends and evolving risk scenarios. Perhaps the single biggest lesson is to expect the unexpected. Outlined here are one or two other issues to keep an eye on.
The global economic crisis is clearly the number one risk issue. In late 2008, the global economy lost its mojo, credit dried up, large financial institutions collapsed, confidence plummeted and the world entered what was feared to be the worst recession since the beginning of the century.
Slowly, through the course of 2009 confidence in some sectors started to return as it dawned on consumers that perhaps the recession would not be as bad as predicted. Towards the end of the year some of the biggest economies began to emerge from recession, including the US, France, Germany and Japan. Recovery, however, is far from certain.
“The recession remains alive and acute,” said US treasury secretary Timothy Geithner. Since the troubles began, some businesses have seen their turnover slashed by half. Unemployment continues to grow in most parts of the world - increasing the risk of civil unrest.
Uncertainty is the biggest risk when it comes to the economy. Serious questions remain about the recovery. Will it be quick, long and protracted or could there be a second dip? Economists at the financial group Allianz predict with 80% certainty that world economic growth will increase to 2-3% in 2010. Recovery in Europe, they say, will be weaker rising to between 1.5% and 2%. However, the economists also say there is a 10% chance of a persistent recession (as well as a 10% chance of a strong upswing).
The potential for recovery varies between regions. Australia's economy, for example, is buoyed by strong growth and demand for its resources in Asia, particularly China. Canada's huge resources industry has also benefited from China's continued growth.
Until bank lending, which fell off the edge of a cliff last year, begins in earnest a sustainable recovery is impossible and companies will continue to think carefully about where they spend their money.
Some policy-makers hope that pumping money into the economy, through quantitative easing, will kick start lending and consumption. However, in so doing, they are running the risk of damaging the value of assets or income as inflation shrinks the purchasing power of their currencies.
Government stimulus packages have had some positive effects. However, it is uncertain what state the economy will be in once these measures have been withdrawn. As economies start chugging back to life the oil price has started to recover too (around $77 a barrel in November compared with $33 last December), but a spike, caused by a political crisis, could destabilise recovery.
The banking crisis, ultimately caused by unrestrained growth, forced the world to re-evaluate the capitalist system. While proponents leapt to its defence, governments in the West decided that better regulation is the answer. The Madoff fraud in late 2008 and the Stanford case a few months later revealed that the financial system was in desperate need of tightening up its risk controls.
Since then there has been a backlash against the financial industry and moves to increase regulation, particularly of rating agencies, non-traditional financial firms and complex financial products. Much of this is seen as posturing and politically motivated. However, it is more than likely to increase the costs of compliance for these companies and permeate out to other sectors.
Regulators around the world are beefing up their enforcement efforts to combat international crime and corruption. Meanwhile, liability regimes are becoming no less strict. The new Democratic administration in the Whitehouse, for example, is more likely than its Republican predecessor to introduce consumer protection powers.
When the economy faltered, some were concerned about governments introducing measures to defend their national interests. Protectionism was seen as a dangerous trend. Recently international organisations like the UN and G20 have won support for a united response to the global financial crisis. An increase in protectionism, however, remains a distinct possibility. In developing parts of the world the threat of asset confiscation, expropriation and nationalisation has increased. The economic outlook looks set to accentuate this trend.
The centre of the world’s terrorism and security risks has been moving eastwards over the past decade. Security forces believe the biggest risk of all (a major terrorist attack in the West) is most likely to come out of Afghanistan or Pakistan. This is not less likely in 2010.
The security situation in Afghanistan significantly deteriorated in 2009. Coalition occupying forces suffered a spike in casualty numbers. Towards the end of the year the UN pulled out of the country. President Hamid Karzai's corrupt and mistrusted government retained its grip on power based not on popular support but because elections are impossible and no alternative presented itself.
Over the past 18 months piracy has emerged as a serious problem. Global piracy hotspots include the coast of Somalia and the Gulf of Aden, around the coast of Nigeria and Equatorial Guinea, the Western Indian Ocean and the Caribbean, particularly off the coast of Trinidad and Tobago and Haiti.
Modern day pirates have not just extended their geographical reach, they have become bolder, better armed and attacks have grown in both number and ferocity. The average ransom in 2008 was between $1m and $2m. This has leapt up to between $2m and $3m, according to Lloyd's underwriters.
Somalia in particular is starting to become reliant on the money which piracy pours into the local economy. Some estimates suggest piracy has injected some $90m into the Somali economy. Most of the costs of ransom piracy are being born by the shipping and energy sectors.
No one really knows precisely what impact global warming is going to have on the earth's natural environment? Few would disagree that the world is getting warmer and this is likely to lead to some big changes.
Scientists agree that the Arctic ice cap is melting, although the speed and extent of decline remains a subject of fierce debate. The latest research claims that 40% of the summer ice cover has disappeared - an area the size of the US.
In September two commercial ships used the Arctic to transport goods from South Korea to the Netherlands. At the same time Arctic states are busy staking claims to the newly accessible sea-bed and the precious resources beneath it. An ice free Arctic presents opportunities for those seeking to exploit the regions resources - although this will more than likely contribute to the world’s problems.
The heat differential between the polar ice caps and the equator drives much of the world’s weather system. Melting Arctic sea ice could lead to more extreme weather events in the northern hemisphere such as storms, flooding, droughts and water shortages. Further in the future, climate change could significantly reduce crop yields, leading to famine, and force massive migration, particularly from equatorial climes, with the associated societal impacts.
One of the biggest stories of 2009 was the swine flu outbreak. While it was much hyped by the world’s media, and quickly attained pandemic status, as yet swine flu has, mercifully, not claimed as many lives as once feared.
As it stands 199 countries have reported cases of swine flu with over 6,000 deaths. The speed at which the flu strain spread around the world was its most notable characteristic. The pandemic scare forced business, governments and international organisations to prepare their crisis management and continuity plans.
Most international organisations should now have a pandemic plan in place. How well they are capable of enacting those plans is another matter. The residual exposure to a pandemic, however, must have been somewhat reduced since last year because the world is now more prepared.
Computer crime, data loss and critical IT failures, all fall under the umbrella of cybersecurity - a threat that has quickly emerged from the realm of future risks. Cyberspace is fast becoming the new frontier in criminal activity, attracting a broad range of thieves, organised criminals, hostile states and terrorists.
The integration of digital information into the modern world is total. Practically everyone holds some personal information in a digital format, and it’s this that criminals are seeking to exploit. Nowhere is this more obvious than in the realm of international business.
In October, Yahoo, Google and Hotmail were all attacked by cyber gangs resulting in the loss of thousands of passwords. IT and information security are often among the most likely cost centres to experience cutbacks in funding when companies fall on difficult economic times. Online criminals will seize on the opportunity when corporate defence is at its weakest.
Black swans do exist. Preparing for these extremely unlikely but high impact events is next to impossible. Black swans are, by their nature, totally unpredictable. The only thing that an organisation can hope is that its strategic continuity plans are sufficient to allow it to identify and react swiftly enough to these threats from these ‘unknown unknowns’. Giving just one example, Risk Management Solutions calculated that a large comet or asteroid exploding over a densely populated area like New York City would cost in excess of $1 trillion.
Nathan Skinner is associate editor, StrategicRISK