Question

In early 2011, political revolution started in many Middle Eastern and African countries. Discuss the actual, probable and potential effects of the political turmoil on MNCs that operate in these countries. Specifically, describe the risk MNCs face while operating in these countries.

Answer 1

The risks that these businesses face are:

1. Political risk: Unstable government or no government will mean no real economic growth in the country and hence the businesses in such countries face loss in business growth

2. Exchange rate risk: Due to the political turmoil, there will be adverse impact on trade between countries and the local currency may depreciate fast. This will act as a strong inflator or a deflator in profits. If you are an importer, you may face extreme pressure and if you are an exporter, you may be at benefit.

3. Interest rate risk: As the political turmoil reaches the peak, the inflation in the local country is bound to rise and this will force the central bank to hike interest rates. This will cause an increase in cost of capital and businesses will have lower profits due to higher rates

4. Hyperinfation: If the turmoil continues without stop, it may be better off for the MNC to completely stop operations on the foreign country. It is because of hyperinflation. Countries like Zimbabwe faced hyperinflation where their local currency depreciated at a very fast rate and hyperinflation resulted in the Zimbabwe currency being totally useless and they had to use the US dollar for trade activities.

5. Coup: In countries like Egypt, there was a military coup and an emergency like situation in which there was mass looting and destructions. Several MNC's lost everything they had and entire production facilities were burnt down in violent demonstrations.