Export Risks & Management - sidf.gov.sa

1 Marketing Consultancy Division (MCD). Export Consultancy Unit (ECU). Export bulletin No. 6. Export Risks & Management `. TABLE OF CONTENTS. Export Risks & MANAGMENT. Page INTRODUCTION 1. RISK ASSOCIATED WITH EXPORTING 1. Areas & Causes of Export Risk 2. RISK Management 4. Risk Management Structure 5. Implementation of Corporate Risk Management System 6. HOW TO MITIGATE Export Risks 9. COUNTRY RISK RATINGS FROM MAJOR. ASSESSORS/INSTITUTIONS 13. Country Exposure Limits 14. Current Country Risk Assessment 15. AVAILABILITY OF RISK SERVICES 16. USEFUL WEBSITES 17. RISK Management TERMINOLOGY 17. SUMMARY 17. APPENDICES. 1. Useful Websites i 2. Risk Management Terminology v 3.

2 Country Risk Ratings of Several Risk Assessment Organisations (for July, 2004) vi 4. Availability of Risk Services viii `. 1. Export bulletin No. 6. Export Risks & Management INTRODUCTION. In taking a decision to Export , there are many facets that need to be evaluated by the local Producer/Exporter before a final conclusion is reached. Apart from assessing the market potential of the target countries, there is also a need for the KSA company to evaluate the different types of Risks ' associated with exporting to particular territories. In this context the company needs to implement in-house risk Management systems which can deal with the levels of corporate Risks associated with both the domestic and Export markets.

3 In order to understand Risks ' and implement risk Management strategies, the following sections outline the areas of Export risk' that need to be assessed so that a system can be put into place to mitigate against them. Not understanding Risks ' or implementing suitable mechanisms to minimise corporate risk could have a detrimental effect on the overall performance and profitability of the company - in the worst case scenario it may mean the liquidation of the company. The following sections outline:- (a) the Risks that exist in Export , (b) what is risk Management , and (c) how to mitigate against the Risks . Also included in the text and Appendices are details of (i) current country risk ratings, (ii) the availability of risk services, (iii) useful websites, and (iv) risk Management terminology.

4 Risks ASSOCIATED WITH EXPORTING. In the context of undertaking foreign trade, KSA Producers who are exporting or who are planning to Export are subject to different types and ranges of risk than they would experience in the domestic market. International trade is affected by, but not limited to, a range of Risks that need to be addressed and which include:- Country/political risk. Currency exchange risk - the stability of the local currency market. Transfer risk Credit risk relating to credit & financing. Non-performance risk. `. 2. Transport risk. Legal risk. Risk of fraud. Risks related to social, and geographic issues. Foreign risk, therefore, requires Producers/Exporters to take additional precautionary measures to protect their corporate interests as these risk variables directly impact on their customer's ability to pay for the products being supplied.

5 It is, therefore, inevitable that dealing with customers in other countries adds a layer of complexity to any trade dealing, so it becomes essential to be aware of the various types of potential commercial Risks and to understand the strategies that can help the KSA company to protect its business against them. Areas & Causes of Export Risk Knowing the Risks associated with exporting to a particular country is, therefore, an important factor, as it could determine how the company will mitigate against these Risks . This also has a bearing on the level of market penetration and profitability that can be achieved in a particular target Export market. To understand these risk factors, the following is a brief description of the likely problems that may arise and which will need to be addressed in the main risk groups associated with exporting:- Country/political risk - this implies the threat that some government action could interfere with Export /import commerce in some way, which could take several forms, including loss of property, market share, ability to operate etc.

6 This is prevalent in those countries that may experience major political instability, which could result in defaults on payments, exchange transfer blockages, nationalisation or confiscation of property. Various organisations monitor the effects of political changes on businesses and a list of websites is provided (see APPENDIX 1) which can assist in keeping abreast of any changes in this area. Legal risk - differences in local laws can exist in overseas countries, which may have an impact in areas such as import procedures, taxation, employment practices, currency dealings, property rights, the protection of intellectual property, agency/distributorship and other related subjects.

7 Obtaining advice from respected/reputable legal practitioners in the target countries concerned is, therefore, important in order to understand the legal obligations for the KSA company, before it starts to Export its products to the target country. `. 3. Credit & financing Risks this implies that possibilities exist that:- (a) a customer will default on payment, and/or (b) the customer's business may fail, and/or (c) there is political or economic volatility. For a KSA. company to protect itself against payment default it is sensible, at least initially, to use payment methods which can provide some level of security irrevocable letters of credit. The Producer/Exporter's bank should be able to provide advice on payment options and their relative advantages.

8 Banks can also advise how a company can protect itself against changes in currency fluctuations as international trading exposes the Producer/Exporter to foreign exchange Risks . In addition to the above, there are a number of other secondary risk concerns that the KSA company needs to be aware of, which include:- Macro-economic mismanagement risk this relates to governments who may pursue unsound monetary/fiscal policies if a situation occurs where a country's policies:- Has an increase in its money supply inflation will occur which can affect the Producer/Exporter in terms of higher local costs, difficulty in planning, currency depreciation, etc. Runs a fiscal deficit then the following could occur and effect the Producer/Exporter:- o Higher interest rates may need to be implemented which would create higher borrowing costs in the target country.

9 O Recession could be produced, which would lower demand for products in target market. o Hard currency shortage could be created, as the government may use its hard currency earnings to pay foreign debts. Insurance gap risk the possibility that multi or bi-lateral or private insurance cover may not be obtainable or only partly available due to the country/political risk of a particular Export county being high. This leaves an insurance gap that cannot be covered except by the Producer/Exporter himself. Here it may be possible to take out insurance cover from several sources that will cover different aspects of the deal, instead of trying to secure a single insurance deal.

10 `. 4. Cargo theft risk this is a growing areas of risk where the cost of insurance cover is rising regularly because the incidence of theft is also rising rapidly. Other areas of Risks these could include the following:- War & civil disorder creating general disruptions in getting products to market. Labour unrest creating higher costs, work stoppages, etc. It is hoped that this information will assist the KSA Producer/Exporter to plan ahead for exporting, as he needs to be aware of the range of Risks that exist, how they can affect his business operations, understand how to manage these Risks , and to implement corporate systems to minimise against them. RISK Management .