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The Global Risk Matrix Q2 2017

10 Key Risks for Businesses in a Global Economy

The Dun & Bradstreet Global Risk Matrix ranks the biggest threats to businesses based on each risk scenario’s potential impact on companies, assigning a score to each risk. The scores from the top ten risks are used to calculate an overall Global Business Impact score. Our latest Global Business Impact score highlights a significantly improved risk outlook for cross-border businesses: following last quarter’s significant fall, the score has now declined even further, to its lowest-ever level.

Risks At Their Lowest Since Global Risk Matrix Launched in 2013

Dun & Bradstreet’s Global Business Impact (GBI) score for Q2 2017 recorded a second consecutive all-time low, falling from 225 (out of a maximum of 1,000) in Q1 to 222, indicating a further improvement in the global business operating environment. The score is a significant improvement on the position at end-2016, when the score was at an almost record high of 281; the Q2 outcome is also well below the long-term average of 250.1. The latest score confirms our view that business conditions, although still feeling the after-effects of the global financial crisis, have been able to cope with uncertainty caused by the unexpectedly dramatic political events in 2016 – such as the UK’s vote to leave the EU and the election of Donald Trump as US president. These two events dominated the Global Risk Matrix (GRM) at end-2016. Nevertheless, business conditions are still more challenging than they were before the global financial crisis.

 

Our top ten risks combine an assessment of: (i) the magnitude of the event’s probable effect on the global business operating environment, on a scale of 1 to 5 (where 1 is the smallest impact and 5 is the largest); and (ii) the likelihood of the event happening.

 

Six New Risks in the Global Top 10

The Q2 2017 GRM has six new entries from five different regions, highlighting the fact that finance, procurement, and supply chain teams across all business sectors face urgent and ever-evolving risks in an increasingly complex and globalised world. The six new-entry risks are:

  1. The widening investigation into the Odebrecht bribery scandal, which includes 11 Latin American countries, leads to the cancellation of dozens of worldwide infrastructure projects, resulting in substantial losses for foreign partners/contractors (GBI 24, out of a maximum 100);
  2. Parliamentary elections in Italy end with the victory of anti-EU parties, triggering further pressure on the EU (GBI of 24);
  3. The IFRS 9 standard for banks due to come into force from January 2018 causes a broad increase in loan loss provisioning by banks globally, and lowers credit growth in bank-led credit markets (20);
  4. Persistent economic hardship and growing frustration with government policies and corruption trigger upheaval/revolutions in Eastern Europe and Central Asia (EECA), leading to the collapse of political regimes (18);
  5. Russia's military build-up along its eastern flank and reciprocal measures from NATO trigger a direct military conflict (16); and
  6. The US Federal Reserve raises rates too fast to pre-empt inflationary pressures, choking US expansion and increasing the pressure on emerging market currencies. (16).

Among our pre-existing risks, we have decreased the likelihood (from 60% to 50%) of the imposition of adjustments to border taxes in the US triggering a possible trade war. We have also decreased the likelihood (from 35% to 33.3%) of contagion from bad debts in Chinese industry and local government triggering a hard landing for GDP and state rescues of mid-tier banks, but increased the possible global impact from 3 to 4 (out a maximum 5). This has resulted in the GBI increasing from 21 to 26. The remaining two risks saw no change in their GBI scores from Q1 2017.

Diversified Sources of Risk: North America, Pan-Regional, Asia Pacific

The GRM for Q2 2017 is our most diversified to date, with risks emanating from six of our seven regions – North America (2), Asia Pacific (1), Latin America (1), Western Europe (1), Middle East and North Africa (MENA) (1), and EECA (2) – as well as two pan-regional risks.

The top risk in our GRM emanates from North America. This relates to our fear of a global trade war as the imposition of a border adjustment tax on US imports triggers formal protests and probable retaliation from America's largest global trade partners. This would curtail further (already weak) global trade and investment growth, undermining the global economic recovery. We have assessed the GBI score at 30 (out of a maximum 100), down from 36 in the previous report.

The other risk emanating from North America is in equal ninth position with a GBI of 16, and is a new entry. This risk relates to concerns that the US Federal Reserve raises interest rates too quickly to pre-empt inflationary pressures, which would have the double impact of choking US growth as well as adding to pressure on emerging market currencies and, by extension, on growth prospects.

In second place overall, with a GBI of 28 (no change), is the foremost pan-regional risk. As highlighted over the weekend of 13 May 2017, rapidly growing cyber dependence and connectivity is set to lead to increasingly frequent and more damaging cyberattacks, with ramifications for doing business. The second pan-regional risk is a new entry in equal sixth place with a GBI of 20, having been bubbling under the top ten previously. This refers to the IFRS 9 standard for banks due to come into force from January 2018. We are concerned that this could cause a broad increase in loan loss provisioning by banks globally and lower credit growth in bank-led credit markets.

The only risk emanating from the Asia Pacific region is in third place with a GBI of 26, up from 21 and fourth place in the previous report. The risk concerns possible default contagion in China, necessitating state rescues and emergency capital issues, particularly for mid-tier banks, and triggering a hard landing for the Chinese economy, in turn impacting negatively on global growth prospects. 

Latin America, Western Europe, MENA, EECA

In equal fourth place with a GBI of 24 is a new entry emanating from Latin America. This risk relates to the widening investigation into the USD788m Odebrecht bribery scandal. This already includes 11 Latin American countries and several more extra-regionally. We fear it could lead to the cancellation of dozens of worldwide infrastructure projects, resulting in substantial losses for foreign partners/contractors.

Also in equal fourth place, and a new entry, with a GBI of 24, is a risk emanating from Western Europe. This concerns parliamentary elections in Italy in February 2018 resulting in a victory for anti-EU parties. This would increase pressure on the viability of the euro and throw doubts on the ability of the EU to survive, in turn triggering huge uncertainty for cross-border business with the EU (and indeed for such business within the bloc itself).

 

The risk emanating from the MENA region has the same GBI score of 20 as in the previous report, albeit down one place to equal sixth. This risk is associated with the military success in combatting Islamic State in Iraq, Syria and Libya. Our concern here is that this will result in the group undertaking high-profile attacks in the Middle East, Europe and Asia in order to offset the setbacks. This could disrupt the business environment in the three regions.

The final region to feature in the top ten is EECA, which has two risks, both new entries. In equal eighth place with a GBI of 18 is our concern that persistent economic hardship and growing frustration with government policies and corruption trigger upheaval/revolutions in the region, leading to the collapse of political regimes and huge uncertainty for businesses in the short term. Finally, in equal ninth place, with a GBI of 16, is our fear that Russia's military build-up along its western flank and reciprocal measures from NATO trigger a direct military conflict.

Summary: Business Environment Improves, But Remains Challenging

The Dun & Bradstreet Global Business Impact score for Q2 2017 highlights that risks facing businesses have fallen slightly again, following a significant drop in the previous quarter, and are now at their lowest level since the GRM started. This indicates that businesses have overcome the high levels of uncertainty caused by the Brexit and Trump votes in 2016. Nevertheless, the business environment remains challenging, and business decision-makers need to be aware of the rapidly-changing risk environment.

 

 

 

 

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