Contingency Planning

Analysis: Multinational Organizations Face Elevated Risk Of Business Of Interruption In 25 Of World’s Largest Global Economies

January 24, 2008

 In 25 of the 50 largest global economies, multinational organizations face elevated political and economic risks -- including business interruption caused by war, terror attacks and political interference, according to an analysis released recently by Aon Trade Credit Global, a unit of Aon Corp.

Among the top 50 economies, the analysis found political and economic risk is at its highest in the oil-rich nations of Iran, Nigeria and Venezuela, where businesses face civil unrest, war, terrorism and nonpayment by governments for services rendered.

While the likelihood of terror attacks, crippling regulatory changes or strikes and civil unrest is relatively low in most of the world's wealthiest nations, such risks are very real in the nations whose economies are among the fastest growing. For example, companies doing business in Russia face an increased degree of state control in the natural resources sector. Additionally, the global risk management community is increasingly concerned about supply chain risks in Asia.

"I have noted a significant increase in the number of CEOs, CFOs and chief risk officers who are seeking a greater understanding of how their businesses are at risk in an increasingly complex global environment versus their primary risk concerns 10 years ago," said Bryan Squibb, managing director of Aon Trade Credit Global. "Risk is one of the fundamental drivers of the global economy, and misunderstanding it can be fatal to a business. “

Slowed global economic growth -- particularly in the United States, where falling home values and rising unemployment are contributing to fears the world's largest economy will sink into recession this year -- will directly impact the credit quality of companies, increasing their risk of nonpayment of receivables.

Some countries, particularly the newer entrants to the global economy, are more likely to be impacted by a global credit crunch. Some examples are Turkey, Hungary and Romania.

While political and economic risks to companies doing business in the United States, Germany and the United Kingdom -- the world's largest, third largest and fifth largest economies, respectively -- are comparatively low, companies doing business in those countries are potentially more vulnerable to business interruption due to terror attacks than those doing business in Japan, the world's second largest economy.

Risk in Brazil, Russia, India, China, South Korea and Mexico is characterized as Medium-Low or Medium. They are the only nations in the top 15 for which risk is not characterized as Low.

Observations for each follow:

• Drilling in an oil field off of Brazil's southeast coast could lead to greater economic growth in the next five years and position the nation as one of the leading oil exporters in South America.
• In Russia, the economic and political situation is forecast to remain steady through the presidential elections in March 2008 and beyond.
• Discussion of the nationalization of certain industries in regions of India should not contribute to a widening of political and economic risk in 2008.
• In China, continued economic growth could lead to a widening of the economic disparity between rich and poor, which in turn could lead to a slight rise in political unrest in 2008.
• Continued stable relations between Seoul, Tokyo and Washington are expected as new President Lee Myung Bak takes office in February 2008.
• Despite record revenues of $100 billion in 2007, Mexico's state owned oil company recently reported a decline in output, exports and proven reserves.

Most of the world's oil reserves are held by government-controlled oil companies. As the global demand for oil continues to grow in 2008, most of the demand will continue to be met by state-owned companies in nations with elevated levels of political and economic risk.