January 23, 2019

Risky Business

Share Button
English: A dice

A dice (Photo credit: Wikipedia)

Pity the poor strategic manager in Jamaica!   The strategic value of effective risk management is undoubted.   Knowledge of key environmental risks assists in shaping the strategies of the firm.  But what do you do when those risks are “unforeseeable” and there is no way of knowing what they are?  Students of the EBS course “Strategic Risk Management” are well aware of the concept of unforeseeable risk, and how it can be treated with appropriate contingency planning.  But given the current economic environment, can the unforeseeable risks facing Jamaican firms really be managed?

First some background.   Jamaica is a small, import-dependent, open economy that has compensated for reduced foreign exchange earnings with increased borrowing to finance practically all economic activity.   In recent times the loan inflows have dried up, throwing the economy into turmoil.  To address this, for the past year the government has been negotiating a new loan agreement with the IMF.   The expectation is that the IMF seal of approval will engender confidence in the government’s economic programme, and therefore re-open the door to foreign exchange inflows from international investors and multi-lateral lending agencies.

In the past, Jamaica has had a rocky relationship with the IMF.   Their “structural adjustment” (read austerity in the form of higher taxes, currency devaluations and public sector expenditure cuts) economic prescriptions have been blamed for exacerbating many of the problems caused by the poor fiscal policy decisions of Jamaican governments.    Over the years, managers have learnt how to identify and assess the risks and opportunities associated with IMF negotiations and subsequent agreements.   In fact, there is a high level of familiarity with risk mitigation measures such as reducing discretionary spending to compensate for the cash-flow risks of one-off profit surcharges; pricing imported goods at an expected exchange rate; or increasing advance purchases of imported raw materials to hedge against increased customs duties.  The new round of negotiations brought jitters, but didn’t seem to be throwing the risk profile of companies in disarray. Been there done that, right?

Then the situation in Cyprus came along.  A new reality now exists, as the realisation is that nothing is off the table when it comes to IMF dictates.   In Cyprus, the initial recommendation to tax bank deposits so as to ensure the sustainability of the financial system ran the risk of destabilising the world economy.  A whole myriad of interconnected and cascading risks would flow from this that would touch everyone, even a small country 5,000 miles away.   Would tourism earnings fall if the Euro collapsed?   Would turmoil on world financial markets make it impossible to obtain the foreign exchange to purchase raw materials?   What would happen to oil prices and the energy bill facing companies?  The typical risks we face when IMF negotiations are being conducted are now out the window and “anything goes” is the name of the game.  Can Jamaican managers plan in the new environment where they must expect the unexpected in the still-to-be-completed IMF negotiations?  Formerly, a self-defeating proposal to stabilise a country’s financial system by creating unstability would have been the last thing anyone would have thought of planning for, but here it is!

Of course, it can be argued that the situation in Cyprus is different and the prescriptions there would never be recommended anywhere else.  But then, in 1945 it was thought that the UK would never rely on the IMF.   I guess the old adage still applies when it comes to the dealings of the IMF…the more things change, the more they remain the same!