William De Vijlder, Group Chief Economist, BNP Paribas zooms in on increasing geopolitical uncertainties.
The slowdown of the global economy which became increasingly visible in the second half of last year has many causes, but there is broad agreement that rising trade tensions, import tariff hikes and concern about the pace of US monetary tightening acted as clear headwinds. In Europe, Brexit-related uncertainty played a role, as well as sector-specific issues, like new emission standards for the automobile sector. Clearly, uncertainty, in various guises, was a big issue: uncertainty about the economy (the international consequences of China’s slowdown), about economic policy (the Federal Reserve’s monetary stance), about political decisions (soft or hard Brexit, Italy’s budget) and about geopolitics (considering that the build-up of commercial tensions between China and the US is about more than the bilateral trade deficit).
Geopolitical uncertainties on the rise
Whereas economic, economic policy and political uncertainty tend to come and go, depending where we are in the economic and political cycle, research based on media coverage of geopolitical tensions shows that geopolitical uncertainty has on average been higher since the turn of the century compared to the 1990s. This higher average is associated with an increased frequency of uncertainty spikes, triggered by events like 9/11, the Iraq war, the Arab spring, the Crimea, Syria, terrorist attacks, etc. These events illustrate that geopolitics now covers a broad range of issues, well beyond the older concept of how nations project their power internationally and react to the behaviour in this respect from other nations.
Empirical research shows that an increase in geopolitical risk weighs on industrial production, employment, international trade, consumer confidence. Moreover, whereas certain events can have a short-lived economic impact, because after a spike, uncertainty drops quite quickly, geopolitical threats (without an event necessarily occurring) can cause a sustained increase in uncertainty and hence have a longer lasting impact. This issue of resolution of uncertainty (“how much longer do we need to wait until we know the outcome?”) has been clearly visible in the reaction to the postponements of Brexit day.
A top priority?
Newspaper articles about geopolitical risks may be numerous but, judging from the mapping in the Global Risks Report 2019 of the World Economic Forum, companies are, in recent years, more concerned about climate change and cyberattacks. In the assessment of their likelihood and impact, they score above average, whereas issues related to geopolitics score around average. This is still sufficient for companies to pay particular attention to it, given the macroeconomic headwind coming from protracted uncertainty or the possible non-linear consequences of risk events. The list of questions to be tackled is long but, as usual when dealing with uncertainty, it is about how can uncertainty be monitored, what is my exposure and how can I manage it. The monitoring is the easier task of the three, considering that there is no lack of research on geopolitical topics. High quality, media-based uncertainty indicators are even available for free on the internet.
“The tensions between the US and Turkey in the summer last year turned out to be short-lived, but they remind us of the necessity to define in advance how to cope with short-lived versus sustained increases in geopolitical risk. “ William De Vijlder, Group Chief Economist, BNP Paribas
Direct and indirect exposure
Assessing the exposure is already more complex, in particular when dealing with indirect exposure. Moreover, one should not only assess where geopolitical threats or events can impact your business, but also, and this is the more difficult question, to which extent.
Direct exposure is about: does geopolitical uncertainty influence how and where I produce (which commodities, which intermediate inputs, how complex a global value chain); does it influence the markets into which I sell; does it influence my financing costs, my access to financing, the use of my cash-flow, the repatriation of foreign profits?
When analysing indirect exposure, the questions ultimately are the same, but the channels are different, more complex and hence challenging to assess. Globalisation has enabled companies to broaden their customer base and lower their cost base, but, with a slight exaggeration, it implies that anything can hit them anywhere. When the US and China are negotiating on trade, it can end up impacting third party countries when it leads to trade diversion (the innocent bystander syndrome). There can be political contagion with unrest in one country spreading to other countries which suffer from similar problems. Financial markets can act as an accelerator or a channel of transmission. The increasingly harsh tone between the US and Turkey in the summer of last year unnerved international investors and contributed to the significant weakening of the Turkish lira. It also raised concerns about financial contagion to other emerging market currencies. Eventually, the tensions turned out to be short-lived, but they remind us of the necessity to define in advance how to cope with short-lived versus sustained increases in geopolitical risk.
Accepting or avoiding the exposure
“Coping with” can mean to just accept it as a fact of life, to build a robust strategy which takes uncertainty explicitly into account or to simply avoid the exposure. Accepting the exposure could make sense if, all in all, the financial impact of risk events would be rather limited. The cost of protracted uncertainty can be taken into account by using a sufficiently high return on investment target before committing money.
Avoiding the exposure could be justified if the trade-off between return and (tail) risk is unattractive, if it would trigger a disproportionate attention by shareholders or creditors, if attractive alternatives to grow the business are available, etc. ‘Avoiding’ could also mean ‘waiting to decide on an investment’ but this raises the question of the opportunity cost of waiting. If a company was contemplating to build a factory in the UK before the Brexit referendum, is there an opportunity cost to waiting for the type of Brexit when alternative locations, outside the UK, are available? When time is money, waiting ends up being expensive.
The question of building a robust strategy is the more interesting and challenging one. It starts from the observation that we are (or need to become) active in a country (e.g. because it is a huge market or because it is key to remain competitive) but that this could increase the exposure to geopolitical risk. In designing a robust strategy, different scenarios are analysed and eventually, the chosen approach should do well under a multitude of environments, without being optimal in any specific one, simply because, in deciding under uncertainty, we are (by construction) not in a position to anticipate which one will materialise. Ongoing geopolitical risk monitoring will allow to plan for corrective action if need be as time goes by.
Exportation: risk control in the palm of your hand
The Credendo mobile application provides a solution to mastering the export risks and information associated with the various world markets...
The importance of exports for the economic strength of companies, especially SMEs, is no longer in doubt. Nevertheless, the uncertainties associated with going international can keep some companies from taking the leap. To turn uncertainties into opportunities: Credendo!
Exporting: opportunities to be taken
In an increasingly globalised world and with an explosion of digital tools, most companies sooner (sometimes much sooner) or later dream of conquering foreign markets. And with reason. Whatever the size of your company – even if big companies are more active on this issue – exporting represents an opportunity to leave the limitations of the Belgian market behind in order to energise your turnover, make economies of scale, explore new outlets for your products or even benefit from advantages in terms of employment and innovation.
Given their increasing confidence, companies will be even more attracted to going international in the future. In any event, this is what the Credendo and Trends-Tendances export barometer reports, indicating that four out of five Belgian companies are expecting a growth in exports during the next few years. An optimism that is only slightly dampened by the fear of protectionist barriers being raised in different regions of the world... One more fear to add to the classic obstacles in exporting, such as different legal systems, increased risk of non-payment, political-economic uncertainty in the destination country and the burden of administrative formalities.
Credendo: a new tool for exporters
Zero risk is a myth and even more so when dealing with business overseas. This is why the European credit insurance group Credendo has developed an application promising to "turn uncertainties into opportunities". How? You download the application to your smartphone and choose to export (long term) from Belgium to Portugal, for example. You immediately receive an up-to-date assessment, practically in real time, of the risks for any country or continent. In the blink of an eye, you can access various important risk parameters and also set up alerts for countries or sectors, benefit from risk analyses and in-depth thematic studies on the economy of emerging countries, for instance. The main advantage of this solution is that it provides information from the point of view of the exporter and directs you to customised solutions. Final detail: the application is free!
For more information for SMEs on going international, the Economy FPS has produced an interesting pamphlet on "International expansion of SMEs: clear findings and operational measures for SMEs" (available in French and in Dutch).
Cover yourself before embarking on a quest for global markets
Any company that begins to trade abroad is buying into the idea that it can conquer brand new markets, but also that new risks are an inevitability. And although the risks are often worth taking, informed directors will evaluate the danger in order to be better prepared.
In love, as in business, distance makes things more complicated. However, in an increasingly globalised world, expanding your business activity into other countries remains essential – especially in an export-oriented country like Belgium. This strategic challenge demands an appropriate approach that will allow the company to move into new territory successfully. Whether internationalisation takes a physical or virtual form, a number of risks of a new type will join those you are already managing at local level, including hazards associated with transportation, exchange rate risks, poor knowledge of regional regulations, cultural or ethical "gaps", and difficulties arising from unpaid sums and recovering these abroad, etc. To minimise the impact on your business, take precautions and correctly signpost the pathway separating you from your international customers.
Where should you venture to?
If you have identified a particular continent or country of interest, you have presumably spotted obvious commercial benefits. You know your business and are convinced that this move can work well. But before you take the plunge, a step back is necessary so that you can analyse the country-related risks: from the geopolitical context (an embargo would be disastrous for your plans) to the political and socio-economic situation on the ground. It is not uncommon, for example, for elections to have a destabilising effect on the climate of a nation.
Do you have sufficient local knowledge?
This question may appear trivial at first, but culture and traditions have a major influence on the way trade is conducted – even in a globalised world. Beyond market expectations and the chances your product has of success, it is imperative to grasp the cultural differences that could have an impact on your business. A Japanese company does not take the same approach as its equivalent in Chile. Do not hesitate to recruit a trustworthy consultant who fully understands the region.
Have you planned for the worst?
This piece of advice is highly pertinent when the country in question uses a currency other than the euro because foreign exchange rates fluctuate continuously, with the result that you could be obliged to convert money according to less favourable terms than those initially expected. Adopt an effective foreign exchange policy (stabilise your profit margins, control your cash flow, mitigate potential adverse effects, etc.) and employ hedging techniques that best suit your situation.
How do you evaluate your international customers?
Once you have analysed the context, drop down a level to gauge the reliability of your customer in terms of their financial situation and history (e.g. of making payments), their degree of solvency, etc. While such research may not be simple, it is decisive in order to prevent payment defaults that can do enormous harm. If in doubt, take out an appropriate insurance policy to protect yourself. Paying for this could prevent you from becoming embroiled in perilous (not to mention costly) recovery action abroad. Should you end up in a crisis situation, you should ideally obtain local support in the country. Finally, be aware that in the EU, debt recovery is simplified by the European Payment Order procedure.
Have you adequately adapted the tools you use?
One of the greatest risks of international trade is transportation (loss, theft, accidents, seizures, contamination, etc.) in addition to customs formalities. Once dispatched, the goods are no longer within your control, and so you must ensure your carriers accept adequate liability. This means, for example, having suitable insurance cover, but also anticipating the multitude of procedures to be launched in any dispute. More generally, you will need to review and adapt the contracts you have with transport companies, as well as your international customers. Ensure you clearly set out the terms and conditions that apply (payment deadlines, exchange rates, compensation, etc.) and include realistic clauses that safeguard your own interests.
How do fraudsters operate? A summary of the most common techniques
Organised and professional fraud have not only become more common, the approach of fraudsters is also increasingly subtle, bold and sophisticated, particularly if they are targeting organisations' financial transactions.
They mostly use (a combination of) the following techniques:
Fake or forged transfers
This technique means that the fraudsters send fake "manual" transfers, i.e. paper transfer forms, letters or faxes, to their target's bank. The signatures on these payment orders tend to be perfectly recreated and can barely be distinguished from the original.
In this case real invoices are intercepted and forged before they reach the debtor or the bank. This takes place at the postal service or at the organisation itself in cases of internal fraud.
The fraudsters then change the beneficiary's account number. For invoices this is often done with a sticker asking you to make your payment to a new account number from now on – hence the name "sticker fraud" – but nowadays devices or software are also used to create near perfect forgeries.
Social engineering and phishing
This form of fraud is based on manipulation: the fraudsters try to mislead their victims by urging them to perform certain transactions, usually involving the transfer of money. To make their orders seem real, they first collect names, direct telephone numbers, account balances, order or customer lists, etc.
This data is usually gathered from public websites or social media or even by retrieving non-shredded documents from bins. However, sometimes the fraudsters also contact the victim directly. They do this in an exceptionally convincing way, for example by pretending to be a member of the management or a colleague from a foreign branch. This type of fraud often results in heavy losses that are sometimes accompanied by extra damage in terms of solvency and the capacity to pay back loans.
Phishing is a specific sub-form of social engineering used by criminals to "fish" for personal data, mainly by e-mail, that enables them to steal money from a bank account at a later stage. This is often done by inspiring a "feeling of fear": they claim that your PIN code has expired or that your account will be closed if you do not respond immediately. In order to increase the fraud's chances of success, the criminals often call the victims in order to "guide" them (also called "vishing").
Whereas phishing is mainly known through mass mailings – a large group of people will receive the same, often rather amateurish personalised e-mail – we have now also noticed a shift in direction towards "spear phishing". Spear phishing means that the fraudsters focus on a very limited number of victims, after they have gathered as much personal information as possible in order to make their message as plausible as possible. These victims are obviously a "lucrative" target for the fraudsters: with affluent private individuals or companies, the loot is often much greater
Whereas social engineering is mainly based on human shortcomings, hacking focuses on technical or material shortcomings. It all starts with a virus that hackers smuggle into your computer. This program collects your data and observes what you are doing. When you open an online banking session shortly afterwards, the hacker is informed. They can then make a pop-up appear on your screen urging you to confirm a payment order or enter your secret code, for example.
Nowadays hackers also increasingly commit multi-channel fraud, during which they call you during your online banking session to request confidential information.
A number of recent fraud cases show that a new and particularly alarming fraud technique is on the rise. An accomplice of the fraudsters seeks employment with the targeted organisation and becomes familiar with the payment and monitoring procedures. After a few months, this "sleeping fraudster" will carry out one or several large transfers to the fraudsters' account and disappear into thin air.
Half of Belgian businesses have inadequate security against cyber-attacks
From the Global Information Security Survey it appears that 1 in 2 Belgian companies does not feel able to track down sophisticated cyber-attacks.
The annual Global Information Security Survey looked at the cyber security of 1,755 organisations from 67 countries, including 56 from Belgium. The results from our country are, to say the least, alarming: half of respondents do not currently feel able to detect a sophisticated cyber-attack, while according to 88% the architecture for securing information does not fully meet the needs of their organization.
The respondents are most concerned about cyber-attacks by criminal organisations (54%), hacktivists (54%), hackers working solo (53%) and – surprisingly – their own employees (40%). Phishing and malware are also high on the list of potential threats.
Five to midnight
Although the respondents realise that cyber fraud is becoming ever more sophisticated and that danger lurks around many corners, less than half have a team for system security. The reason is simple: the vast majority of respondents admit they have no qualified employees available and/or find it difficult to attract people with the necessary skills.
27% do not analyse any cyber threats, while 21% do not even have any identity and access management. In other words, the door to the digital world is wide open to a whole host of trouble. Modernisation of security is therefore urgently needed.
(Source: EY and De Tijd)