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COUNTRY RISK AND GEOPOLITICAL COUNTRY RISK AND GEOPOLITICAL COUNTRY RISK AND GEOPOLITICAL COUNTRY RISK AND GEOPOLITICAL

RISK FOR PLAYERS IN THE ENERGY RISK FOR PLAYERS IN THE ENERGY RISK FOR PLAYERS IN THE ENERGY RISK FOR PLAYERS IN THE ENERGY

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Thierry Apoteker, CEO, TAC

[email protected]

13 March 2013 Conference

Student Chapter SPE – IFP School

Background on TAC

� TAC is a fully independent European research group providing advisory services on international economic and financial issues for financial investors and industrial companies.

� TAC also provides policy advisory services through research funded by multilateral or bilateral donors / institutions.

� TAC’s research is based on a unique “production process” combing specialists in information flow management, database and quantitative modeling, fundamental macro research and competences, and long-term experience.

� By the way, TAC works almost constantly with students through research internships

2Conference at IFP School - Dr. Apoteker, March 2013

Country Risk and geopolitical risk

1.Introduction & Concepts

2. Fundamentals for risk analysis

3. Illustrations and current issues

4. Q&A


The concept of country risk has evolved:

�up to the end of the 80s:

Two major areas of country risk:�Political risk (nationalization/expropriation, violence)�Transfer risk (financial shock / sovereign decision)

Financial relations characterized by:�Mostly public sector borrowers�Official and banking lenders

1. Introduction & concepts


�Since the 90s, a multiplication of risk areas:

Political and transfer risks remain

Macroeconomic or macro financial shocks that derail the normal functioning of the country:�Exchange rate crisis�Brutal reversal in economic activity�Systemic banking crisis�Collapse in financial markets

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Conference at IFP School - Dr. Apoteker, March 2013

The concept of country risk needs to incorporate:

1. More unstable economic and financial conditions

2. A strong inter-relation between economic and political / governance risk

3. More complex financial and trade mechanisms

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For operational purposes:

The definition has to be adapted to the project / company / institution’s objectives and characteristics

Time horizon and crisis intensity as two major defining variables

« Independent » country risk to be crossed with other information for decision making processes

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1. Introduction & Concepts

2.Fundamentals for risk analysis


4. Q&A


� Overview and general comments

� Economic and financial risks

� Political and social risks

� Geopolitics and international relations

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Starting with…

Nobody has a crystal ball and can predict the future: it is a matter of measuring and if possible reducing the uncertainty

Major difficulties or crises occur as a complex result of many inter-dependent factors

A critical point for operational purposes: issues of timing

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Many institutions provide « ready-made » country risk analyses:

International rating agencies (S&P’s, Moody’s, Fitch IBCA)

Research groups (EIU, Frost & Sullivan, TAC, BMI…)

Credit insurance companies (Coface, Euler, …)

International banks

Think tanks, Universities

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Methods:

First step: defining what needs to be measured

Key step: the representation of complex mechanisms and the availability of information

The crucial point of non-linearity in risk materialization

�‘Circumstances’ prone to sudden breaks

�Critical thresholds for « sensitive » indicators

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Methods:

Structural analyses :

�Risk is too complex to be reduced to a quantified / systematic representation

�Structural and non-economic factors are too important

�More comprehensive and refined approach, but more difficult to incorporate into decision making processes and very costly (manpower, financial resources)

�Scenario construction

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Methods:

Linear quantitative toolsScores, Weighted indicatorsStandard econometrics

Non-linear quantitative modelsSignaling toolsNeural Networks (combinatorial processes)Conditional TreesPattern Recognition Tools

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Methods:

Benefit of quantitative tools: clarity, ranking / comparisons, incorporation into other management tools

But they cannot seize the whole complexity of real mechanisms and highly country-specific characteristics

Estimated parameters give a synthetic explanation of past difficulties

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Illustrations on complex models: Neural Networks


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Illustrations on complex models:Recursive Partitioning

1 < 0.0%

2 0.0% - 0.9%

3 0.9% - 1.6%

4 1.6% - 2.2%

5 2.2% - 3.0%

6 >3.0%


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Illustrations on complex models:Self Organizing Maps (SOM)


Economic and financial risks: key factors

Economic growth, external balances, international financing

Economic and monetary policies, exchange rates, foreign currency reserves

Banking system, financial markets

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Political and social risks: key factors

Governance, efficiency of policy makers

Stability of political regime / institutional setting

Social conditions, income distribution

Safety nets, access to basic public services

Ethnic / religious tensions

International relations, geo-strategy

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Transmission risks: key factors

International dependence for trade – specific questions for LLDCs and SIDS

International dependence for finance / funding

Correlation of market movements, international arbitrages

Shocks in neighboring countries (refugees, markets, border tensions…)

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Political contagion : key factors

« Imitation Strategies », cooperation strategies based on ideological alignment…

Interference / trans-border ethnic communities, movement of people…

Conflict as a final result of « finding-scapegoats » strategies

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3.Illustrations and current issues

4. Q&A


Illustrations from TAC research projects

1. TAC Risk Ratings: identifying vulnerable countries and adjusting risk management policies

2. Systemic risk in two “hot spots”: potential implications for oil and gas companies

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Crisis signals

Strong probability of a

significant shock

Azerbaijan

Venezuela

Watch list indications

Vulnerability to a significant

shock during the following

periods :

Angola

Cambodia


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From an oil company’s perspective

No direct or immediate Economic & Financial Risks (insensitive to currency depreciation, domestic activity and payment problems)

But large indirect implications (through fiscal revenues and the sovereign situation)

More acute risk of political / administrative action (Fait du Prince)

Corruption and decision-making processConference at IFP School - Dr. Apoteker, March 2013

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From an oil company’s perspective

Likely disruptions / potential destruction in production (at corporate level: high divergences and indirect benefits of higher oil prices)

Security issues (staff, equipment)

Legal uncertainty (territorial disputes, changes in institutional setting.,…)






4.Q&A


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www.tac-financial.com

Stages, projets de recherches: Isabelle Legrand [email protected]


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