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Risk management, is it rolling dice with the devil?

16 February 2017 Jonathan Faurie

In the political and economic times the world finds itself in, risk has become a central part of our society playing an influencing role in everything we do or hope to do. A good risk manager is worth its weight in gold to a company, and information regarding risk is very important to come by. In an effort to bring this information to the public, the Institute of Risk Management South Africa (Irmsa) recently released the third edition of its risk report.

The report analyses specific industries and labels the ten risks which are most pertinent to it. Irmsa feels that the top three risks that will have an impact on the financial services industry are: a credit rating downgrade, an economic slowdown or recession and an escalation in large scale cyber-attacks. 

On the precipice of junk 

We are all aware of the troubles the country faced last year. And we only know too well what impact a ratings downgrade will have. Business will get tougher and generating new business may require a herculean effort. 

Contributing to the Irmsa Risk, Report Nicky Weimar – a Senior Economist at Nedbank – feels that the likelihood of a ratings downgrade is high this year. 

“A ratings downgrade would trigger a renewed rand crisis as foreign funding leaves. It would also raise the cost of borrowing (which has a specific bearing on interest rates), and it would fuel domestic inflation. The barriers to prevent this risk are also very present and at times can be hard to overcome. These include an ineffective government that has factionalism in the ruling party, rising corruption where there is a tremendous amount of wasteful spending at all levels of government, financial bankrupt and poorly managed state-owned enterprises which are the companies we rely on to do business on a daily basis and the final barrier is poor economic growth,” said Weimar. 

There are a number of ways that the financial services sector can respond to this threat. Weimar pointed out that this includes:

- limiting foreign borrowing, especially short-term;

- diversifying earnings to include other jurisdictions and currencies; and

- improving efficiencies which involves cutting costs and improve productivity without sacrificing long-term sustainability and flexibility. 

A former powerhouse 

Just after South Africa’s first steps into democracy 23 years ago, it became one of the fastest growing economies in the world and the richest economy in Africa. 

We are far from those days now languishing at growth rates struggling to reach half a percent. There are indications that this is changing though with President Jacob Zuma announcing projected growth rates of 1.5% in his recent State of the Nation Address. 

This is far from the objectives set in the National Development Plan (NDP), and Weimar pointed out that there is still a risk of suppressed economic growth. 

“We are currently in an economic slowdown based on the South African Reserve Bank’s official definition and classification. The worst of the downturn is probably over. However, the economy remains very fragile. Consequently, the risk of renewed setbacks remains high,” said Weimar. 

She added that the causes of this slowdown are numerous, but there are three very pertinent ones. First is the increased political turmoil which is fuelling the local currency collapse, higher inflation and rising interest rates. Second is the threat of sovereign risk rating downgrade to junk/speculative status by two or more rating agencies and third is the global growth setback and relapse in international commodity prices. 

This is concerning for the financial services industry as it has the potential to stop the growth of the emerging middle class. This group has purchasing power and are interested in securing the financial wellbeing of their families. 

The new enemy 

Cyber liability is a significant risk which is growing every day. Contributing to the Irmsa Risk Report, Anne Reed, National Risk Manager at BDO, says we need to be aware of this new enemy. 

“When such a risk materialises, it will have a significant impact on the NDP. Hundreds of entities and other stakeholders will be affected. Many stakeholders will not recover, and should an attack be on the water supply, there will be a significant impact on citizens’ welfare and health, and may result in many deaths,” she said. 

Reed added that the extent and depth of the consequence will depend on which digital system was attacked. “For example, if it was the banking digital systems, it would be catastrophic because of the multi-dimensional nature of the banking infrastructure. Whatever digital system is the target, the consequence would be material, significant and/or catastrophic and may even be extinction,” she concluded. 

Editor’s Thoughts:
Risk management and risk mitigation are important components in the financial services industry. This allows brokers and advisers to operate in an environment that enables growth whereby clients are offered the best products at the best prices. This can all change if risk takes over and plays the cards it has up its sleeve. Please comment below, interact with us on Twitter at @fanews_online or email me your thoughts



Added by doczeek, 16 Feb 2017

Poor Governance
Poor Government
Poor Leadership
Poor Populace (AND a downgrade)
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