Question

Understand Political risk, how to measure political risk, implications of political risk, how to mitigate political risk

Answer 1

Political risk is the risk associated with financial, market or personnel losses due to the changes in country's political decisions. An example of a political risk might be a country that suddenly raises corporate taxes for a specific industry. Political disruptions such as terrorism, riots, wars and political elections can affect business decisions.

It is very difficult to measure political risk quantitatively. Companies and investors must investigate and understand the potential for political risks by examining political factors and political institutions in a particular region where the company works. Although political risks can't be measured in terms of quantity it can be monitored by various ways. For example, while taking any important decision, companies should check, is there any upcoming elections? If so, who are the parties and what are their policies? Automated reminders can be set to keep track of potential political risks in major markets. This can keep someone alerted and take the necessary actions to reduce the level of risks.

Political risks can have large and quick impacts on the operations and profitability of a business. The impact of political risk is long-term as the risk continue to rise over time causing different changes to occur. One of the impacts of political risk is a reduction in equity prices.

In order to mitigate political risks a company can follow the following strategies:

a) Management of credit risk : Before a crisis develops, a company should assess its own potential credit risks in the country where it operates and check its credit-control procedures thoroughly. If necessary, bring improvements in its credit-control activities.

b) Ensure the stability of supply chain: A business should ensure the working plans of its supply chain in case of political disruptions. Political disruptions in one country may affect the company's entire global network. A company should make advance plans for alternative suppliers.

c) Prepare and safeguard your working environment : Political disruption can occur at any time with little warning. So advance planning is required to protect working environment and people of a company.

d) Proper use of risk management fund : Every company has a fund for risk management, they should use it wisely so that they will not face a situation of shortage of fund. Political risks may create financial burden for a company, so it should be prepared with enough fund to reduce the impact of risks on its operation and profitability.