Risk management: aware of the obstacles

Businesses face many risks – each an individual challenge to manage and mitigate. But the risk-universe is more complicated than just individual risks. Each risk has some relation to another – the consequences of one potentially being the cause of another. And this is compounded when multiple risks of a significant impact crystallise within close time-proximity of each other.

At the moment there are three risks on the horizon which could combine to create a domino-effect scenario for businesses in the Middle East.

Commodity prices

Led by a rapidly declining oil price, the value of commodities has plunged. Whilst there has been some marginal recovery since last year when values reached their lowest point since 1999, the outlook continues to be highly uncertain. This uncertainty has consequences for all countries exposed to the oil sector and, although Middle East countries are expected to be less affected, this risk remains a significant threat to the economic stability of the region.

Rising cost of capital

A combination of declining oil revenues, higher US interest rates and the start of some regional government 'fiscal belt tightening' is driving up the cost of borrowing across a number of sectors, from financial services to property and construction. Tighter capital expenditure spending is already beginning to cause payment delays for the delivery of contracted services – which may have a knock-on further afield and possibly reduce confidence in the region.

Large capital/value projects

The fragility of the international economy and its highly uncertain outlook for the future, coupled with the rising cost of capital make the margin of error on large capital projects tighter than ever before. Existence is at stake. Businesses simply cannot afford to let high value projects fail – and yet some of the contributory risk factors may be outside their direct control.

What should businesses do to thrive?

A key element is an effective enterprise risk management (ERM) system. By scanning the horizon for new risks, monitoring existing risks and supplying senior managers with up-to-date and accurate analysis, businesses can make better strategic decisions. ERM provides the framework for organisations to gather, interpret and act upon intelligence from across the business. This high level 'knowledge portal' can help organisations stay resilient in an increasingly hostile commercial arena.

For example, ERM facilitates the management of commodity price risk in a number of ways:
 
  • creating appropriate market monitoring and intelligence gathering capabilities which deliver advanced warning of changes in market dynamics
  • a structure to ensure this intelligence is available to the right decision makers
  • internal controls and mitigation plans to mitigate the risk of impacts on the most vulnerable areas of the business.
And crucially, a good ERM system provides the high-level mechanism for establishing links between strategic risks – meaning businesses can plan ahead.

Moore Stephens has a comprehensive range of risk management expertise, and we'd be delighted to discuss how we could help your organisation to become more resilient.

Related pages

Rhiza: risk management tool