4 Key Challenges of Assessing Economic Risk

The way of doing business has changed. Challenges from geopolitical conflicts, high levels of inflation, and supply chain disruption are forcing companies to address new levels of risk and competition. Corporate teams need more access to data and a more comprehensive set of analytics to stay ahead of tomorrow’s unknowns. We examine how companies are investing in data, transforming their tech capabilities, and incorporating country-level intelligence to set the pace for their market and peers.

While the COVID-19 pandemic loosens its grip, there are still a lot of risks out there to corporate credit. And it's more important than ever to keep a focus on individual sectors and individual credits. Cheap borrowing and excess capital has led to less margin for error and more pressure around risk.

We have identified four key challenges of assessing economic risk in times of volatility.

1. Forecasting economic trends in uncertain environments

It is extremely difficult to forecast trends in an increasingly uncertain environment. Some of the key factors that contribute to this uncertainty are both economic and geopolitical in nature. Examples include Russia's invasion of Ukraine, China’s decoupling, and big civil unrest movements across the globe, like in Sri Lanka. These types of political and economic trends lead to a huge difficulty in forecasting macroeconomic trends, but also industry and sector-specific trends accurately.

At our recent webinar, 65% of attendees said that they always consider the economic and country risk in the countries in which they operate, or impact their business, when making decisions. A reliable source of intelligence is critical.

2. Making quantified assessments of political and security risks

This is not only about policy and government stability, but also criminal violence risk, civil unrest, terrorism, and war risk, which might affect the operations of corporates and also, insurance underwriters.

It's important to take this quantified assessment into account to make these risks comparable over time, but also across countries and to set benchmarks or limits when it comes to insurance underwriting, for example. This is difficult because, unlike economic data, political and security risk data is infrequently published by official agencies.

S&P Global Market Intelligence has a large team of risk analysts who evaluate these risks on a scale from 0 to 10. We also use alternative data such as security and incident data, along with a database that measures the severity and the impact of security events across the globe to make them quantifiable.

3. Collecting curated and comparable insights in one place

It's really important to have all relevant insights curated in one place to make it comparable and in order to make repeatable data-based decisions. Many decisions require not only economic but also political risk assessments.

For example, some countries’ economic data might be available open source, and other data might be available via official statistics agencies or from private providers, but different sources publish in different currencies. There will be historical data gaps and they will not be comparable. So, we think it's really important to have this data in one place to make confident long-term decisions.

4. Getting granular insights at the local level

It's not enough to just look at country-level data when it comes to economic or risk indicators, because there are huge differences within countries. It's really important to take the local context, and the local economy, into account when making decisions in large countries such as France, the United Kingdom, Germany, Mexico, or the U.S. 

To take it a step further, there’s a need for subnational, forward-looking economic and country risk data. This local detail is important to measure customer demand for products across multiple regions for example. You also need subnational data to understand the risks and opportunities around establishing facilities in new locations and to identify and compare global business growth opportunities across cities, provinces or states. When combined, all of these economic indicators and risk factors can help formulate rapid responses to unfolding economic and political developments, e.g. Russia’s invasion of Ukraine.