These are uncertain times. From the war in Ukraine and its ripple effect on the global supply chain to the economic problems in Argentina, the airwaves are replete with stories about the intersection of political risk and business. Despite the myriad articles on political and economic uncertainty, foreign investors remain confused about the impact of geopolitics on investment and trade projects. They risk making sweeping decisions about their project, such as pulling out of specific regions or remaining figuratively paralyzed. But a five-point framework can help companies navigate the waters of uncertainty.
Step 1: What is the specific business project?
Company X manufactures pharmaceuticals in the USA and has decided to expand to Argentina. It will source its raw materials from other South American countries and will sell its products exclusively in the host country. The pharmaceutical industry is highly regulated in Argentina. The company’s manufacturing process is complicated and requires employees who are sophisticated and knowledgeable in the area.
Step 2: What is the political situation in the host country?
Far-right populist Javier Milei surprised pundits and voters alike by receiving the most votes in Argentina’s primary election last week. By receiving the most votes, Milei has emerged as the county’s favorite in the upcoming presidential elections in October. As the country again faces significant economic challenges, Milei’s populist rhetoric is resonating with voters in the Mercosur country. Millei’s platform of rejecting claims of climate change, and encouraging the legalization of selling body parts fall in line with many of the ideologies of Donald Trump. Milei’s primary competitors are United for Change (who received 28 percent) and the current governing coalition, Union for the Homeland, had 27 percent. Although Milei is the clear frontrunner, the challengers are not far behind-creating significant uncertainty in a country that continues to face serious economic problems.
Step 3: What are the specific country risk events that can decimate the project?
Because Argentina is experiencing economic and political instability coupled with the fact that the pharmaceutical is highly regulated, regulatory expropriation is one of the primary risks for Company X. Second, the company’s plans to import raw materials means that trade policies will have a direct effect on its bottom line.
Step 4: What are Argentina’s scores in the regulatory & trade policy risk rankings?
Regulatory Risk
The captures the ability of the government to create and implement solid policies and regulations that allow, as well as promote, private sector development. This indicator was chosen for analysis given the importance of having a stable system, where corruption and bribery in favor of local competitors aren’t threats to our investors. In this indicator, one hundred and ninety-one countries were measured, and the average
Singapore Score: 2.23; Rank: 1 out of 191
Argentina Score: -0.62; Rank: 132 out of 191
N. Korea Score: -2.33; Rank: 191 out of 191
Trade restrictions
Trade freedom is a composite measure of the absence of tariff and non-tariff barriers that affect imports and exports of goods and services. The trade freedom score is based on two inputs: The trade-weighted average tariff rate and. Non-tariff barriers (NTBs).
Singapore Score: 95 out of 100; Ranking: 1 out of 100
Argentina: 61.2 out of 100; Ranking: 139 out of 177
Bhutan: 37.6 out of 100; Ranking: 177 out of 177
Step 5: What can the Chief Risk Officer to do minimize risk and maximize reward?
A review of the data measuring the investment climate in Argentina revealed unfavorable results for Company X’s regulatory risks and its exposure to trade restrictions that will prevent or restrict its ability to access raw materials from suppliers in neighboring countries. This does not mean that Company X must terminate its project in Argentina. The Chief Risk Officer can execute simple strategies to reduce the likelihood that certain risks will manifest and mitigate the impact if they do materialize. For example, to reduce the likelihood that the host government uses a regulation to drive the company out of business, the Company can hire full-time regulatory staff that will ensure compliance and avoid the ire of local officials. Second, they can also hire government affairs teams to establish and maintain healthy relationships with government officials. To minimize the impact of high tariffs, Company X can begin the process of exploring domestic alternatives for raw materials and can also rely on the protections of international investment or trade agreements.
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