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Risk management experiences tectonic shift

10 March 2010 Trevor Hoole, National Industry Leader in Financial Services, KPMG International

Fragility becomes the new norm Shift is irreversible

While globalisation has led to the standardisation of knowledge and an increased interconnectedness and interdependence between economies, a consequence of this has been an interlocked fragility which increases risk variables. Interconnectedness leads to a simultaneously more robust and more fragile global economic system. This was the view articulated by Andries Terblanché, Chair of Financial Services of KPMG in Australia at a briefing in Johannesburg.

The tectonic shift in risk began in 1971 when the disjuncture paradigm was again introduced, said Terblanché. “This meant that there was a break between the services and manufacturing aspects of the economy, otherwise known as the symbolic and the real economies. This in turn led to a seismic shift in volatility and hence increased risk. Since then the symbolic economy and the real economy have been moving further and further apart.”

In addition, constant amendments to regulations, policies and frameworks designed to mitigate against risk led to further volatility in the global economy. “Such changes in legislation sometimes inadvertently break the nexus between the service economy and the real economy,” said Terblanché. Tampering with frameworks heightens risk, and various countries have experienced significant economic challenges since 1971.

Further compounding risk and volatility is the inability of mathematical modeling to adequately explain economic trends. While generally underestimating the effects of risk, such modeling is still the only useful tool to understand volatility, however.

Turning to the global economy, Terblanché maintains that increasing complexity due to the increasing number of economic players increases the number of potential outcomes that are possible. “With the participation of 77 key players in the global economy, we have the potential for an unprecedented number of outcomes and developments. Twenty years ago we had fewer economic players – and that is the tectonic shift we are seeing.”

In specific case studies, Terblanché notes that inequality in the US is increasing with the rich growing further away from the middle class. The bottom 50 percent of the US population accounts for less than 20 percent of income. US economic growth will be further hampered by the cost of social security, and of Medicare and Medicaid. Massive debt raised by the Iraq war is an added factor that contributes to the economic challenge for the US.

While China is seen as the engine of the global economy, its massive consumption does not make it invincible. “We have to be mentally agile to contemplate that China might slow down too.”

“There is a need to watch fragility points on global, regional and national spheres. We’re at an economic fault line. The advanced economies are very vulnerable while the emerging economies are, generally, in a better position. This is good news for South Africa,” concluded Terblanché.

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