Strategic risk management; How to initiate sustained economic growth within commodity-dependent developing countries?

Transcription

1 Multi-year Expert Meeting on COMMODITIES AND DEVELOPMENT 6-7 April 2009, Geneva Strategic risk management; How to initiate sustained economic growth within commodity-dependent developing countries? by Mr. Jean-François Casanova CEO, Strategic Risk Management, France "The views expressed are those of the author and do not necessarily reflect the views of UNCTAD"

2 Strategic Risk Management How to initiate sustained economic growth within Commodity-dependent developing countries? Multi-year Expert Meeting on Commodities and Development 6-7 April 2009 United Nations Conference on Trade and Development Palais des Nations, Geneva UNCTAD EXPERT MEETING GENEVA, April Strategic Risk Management

3 Tough time for initiating sustained economic growth Mature economies are in recession Percent change, year ago Percent change, year ago Industrial Production, Manufacturing: US Japan Euro Area Source: Federal Reserve Board. Statistical Office of the European Communities. Ministry of Economy, Trade & Industry Strategic Risk Management

4 Not too good for China Globalization and interdependence spread the pain all over the world % chg yoy, 3mma China Exports 70 EU Japan US Other emerging markets* * Emerging Market Economies: BRICs, ASEAN (including Vietnam) and Middle East, "other Emerging Markets" excludes China. Source: CEIC, GS Global ECS Research Strategic Risk Management

5 Worse for emerging countries, and probably even worse for Commodity-dependent developing countries The dream of Emerging economies internal markets as being a substitute to mature economy has gone % chg yoy, 3mma 80 Exports to China 60 Korea* Taiwan % -40 December % *: Korea exports to China in December is estimated based on first 20 days of data Strategic Risk Management

6 A light of hopes, the emergence of middle class Middle class means mass consumption, Mass consumption means political stability, economic and welfare growth Global Distribution of Income in 1960 Global Distribution of Income in 2008 (log scale) (log scale) World World ex China and India Average World Income =$3,779 6,000 30, World 6,000 30,000 World ex China and India Average World Income =$11, ,346 12,478 46, , ,346 12,478 46, ,586 Source: Goldman Sachs Strategic Risk Management

7 Emerging market potential is huge but critical mass is required Autos per 1000 persons vs GNP per capita (All countries 2007) Autos per Strategic Risk Management

8 Among emerging economies, some oil exporters have critical mass and large oil windfall to invest Autos per 1000 persons vs GNP per capita (Oil exporters only 2007) Autos per Strategic Risk Management

9 Unfortunately, most of CDDC have to find the way to get the critical mass Autos per 1000 Autos per 1000 persons vs GNP per capita (Commoditydependent developing countries 2007) Strategic Risk Management

10 The good news: Mature economies desperately search consumers of last resort CDDC must take profit of the lever of G20 new funding pledges More than 1 Trillion USD These are to be compared to : Marshall plan: 97 Bln over 1948 to 1951 Germany reunification: 600 Bln over 1990 to Strategic Risk Management

11 But it s not enough Doing the same as everyone else or the same as you ve always done, will not deliver a step change in performance Strategic Risk Management

12 Rethinking the way commodities export revenues are managed is a good start Deliver a step change in revenues through Commodities Risk Management Needs and Constraints? What type of current exposures? Does Commodities Prices evolution could be forecast? Ways from forecasts to implementation? How to shape sales to environment? Collect Information Analyse prices determinants for commodities Advanced indicator of prices evolution Commodities Sales Optimization Dynamic management under constraints Which Commodities? What about their sale and their management? Does Price of export commodities is under-evaluated compared to its theoretical value? What impact from change parity? Does this indicator is reliable and stable? Risk Management: How? Hedging or not? Arbitration? What about implementation? How to integrate company s constraints? Strategic Risk Management

13 Assessing price market and its future is mandatory OIL ,5$/bbl 134,8$/bbl Price X 11 Price X 11 3,6$/bbl 11,3$/bbl Strategic Risk Management

14 Analyzing the implications of commodities prices on the global economy is a good way to estimate the future Ratio GNP/OIL Oil price positive for World economy Oil price neutral for World economy Oil price negative for World economy Strategic Risk Management

15 Using hedging techniques is a requisite practice for securing revenues stream Oil example Principal Linked to Oil Price Oil Producer issues USD amortising bond with 5-year maturity for which amortisation payments are indexed to oil price Credit spread over LIBOR will be reduced due to inherent credit mitigation of oil price risk Amortisation payments will be reduced in low crude price environment Indicative Terms and Conditions / Sample Issuer: Oil Producer Principal Amount: USD 300,000,000 Effective Date: March 2006 Maturity Date: 5 years after Effective Date Interest Rate: 3M USD LIBOR + 75 bppa Amortisation Payment ($MM) Illustration of Amortization vs. Oil Price $17 $16 $15 $14 $13 $12 Oil Price ($/bbl) Tranches: XXX quarterly linear amortisation payments Amortisation Payment: Standard Amortisation + Oi Amortisation Standard Amortisation: USD 15,000,000 Oil Amortisation: Volume x { Max [Oil Price - $78/bbl, 0] - Max [Oil Price - $100/bbl, 0] - Max [$55/bbl Oil Price, 0] + Max [$40/bbl Oil Price, 0] } Volume: 100,000 bbl per quarterly Coupon Period Oil Price: Quarterly average of PLATTS mid prices for Dated Brent crude oil * Assumes Client standard funding at 100 bppa Oil ($/bbl) Oil Amortisation Payments Standard Payment Oil Price Strategic Risk Management

16 Once revenues streams will be secured, CDDC will be in a better position to get out of the commodity trap Differentiation is one of the most important strategic and tactical activities in which companies must constantly engage. It is not discretionary There is no reason to get stuck in the commodity trap, forever confined to competing on price alone. Historically, companies that have taken and stayed resolutely on the commodity path have become extinct. Ted Levitt Strategic Risk Management

17 A prerequisite environment is needed for avoiding commodity trap and initiate a sustained economic growth Safe and hospitable investment environment where Governance and profitable opportunities exist Educated and trained human resources to match employers demand Adapted Regulatory Environment and Local financial market Domestic Corporate finance and Fund management capability Industrial know-how and technologies transfer via financial investments Strategic Risk Management 16

18 For achieving sustained growth CDDC have to engage a combined set of actions Optimize commodity export and move to commodity transformation with traditional financial investment, private equity at home and abroad, Take a long term view for managing revenues, Enable the development of competencies poles in Agroindustry, Energy (including Solar and Bio energy), Telecoms, Software, Healthcare, Finance, Tourism, etc... Be inspired by Dick Fosbury, and follow Gulf Cooperation Council and South Korea experiences in investing in less cyclical assets in complement to traditional commodity exports, Create Joint Ventures and Partnerships with independent financial professionals Strategic Risk Management 17

19 In this process, CDDC will face major hurdles which will have to be passed over Bureaucracy Personal Risk Complexity of the concepts Management qualifications Budget-Accounting dilemma Volatility of Risk Strategic Risk Management

20 Key rules have to be followed at corporate level for getting the job done Change the culture by hunting down product or bureaucratic conventions and finding relevant ways of disrupting or destroying them Assess companies current reputation (What, Why, How?) Evaluate firms actual performance (Product quality & financial performance) Close gaps (use JV and PE investors to improve companies reputation through improved capabilities, behaviour, performance and use media for making sure stakeholders know about it) Monitor changes in stakeholder s expectations (use tools as stakeholder surveys, focus group, media analysis to assess your reputation) Put one person in charge of managing your reputational risk (give him the resources needed to do the job and have the credibility and control required for assuming his responsibility and accountability) Strategic Risk Management

21 The long road from large variability of GDP growth toward sustained economic growth, past and present experiences (CAGR average over 5 years) Strategic Risk Management

22 The long road from large variability of GDP growth toward sustained economic growth, past and present experiences (CAGR average over 5 years) Strategic Risk Management

23 The long road from large variability of GDP growth toward sustained economic growth, past and present experiences (CAGR average over 5 years) Strategic Risk Management

24 The long road from large variability of GDP growth toward sustained economic growth, past and present experiences (CAGR average over 5 years) Strategic Risk Management

25 The long road from large variability of GDP growth toward sustained economic growth, past and present experiences (CAGR average over 5 years) Strategic Risk Management

26 The long road from large variability of GDP growth toward sustained economic growth, past and present experiences (CAGR average over 5 years) Strategic Risk Management

27 The long road from large variability of GDP growth toward sustained economic growth, past and present experiences (CAGR average over 5 years) Strategic Risk Management

28 The long road from large variability of GDP growth toward sustained economic growth, past and present experiences (CAGR average over 5 years) Strategic Risk Management

29 The long road from large variability of GDP growth toward sustained economic growth, past and present experiences (CAGR average over 5 years) Strategic Risk Management

30 The long road from large variability of GDP growth toward sustained economic growth, past and present experiences (CAGR average over 5 years) Strategic Risk Management

31 The long road from large variability of GDP growth toward sustained economic growth, past and present experiences (CAGR average over 5 years) Potential line Strategic Risk Management

32 Lesson from history «The transformation of the English commercial mentality from the ethic of "selling dear" to a keener, more combative sort of competitive posture appropriately conveys the new nature of trade, not only in textiles, but in all export industries, and not only for England, but for all of the rising powers of the seventeenth century.» Richard T. Rapp The Unmaking of the Mediterranean Trade Hegemony: International Trade Rivalry and the Commercial Revolution THE shift in the locus of European trade from Strategic Risk Management

33 Strategic Risk Management For any Question : Jean-François Casanova 52, rue de Ponthieu Paris Tel : +33 (0) Mobile: +33 (0) jcasanova@riskvalue.com Strategic Risk Management

34 Investment review: key points to be «raised» Strategies and risks associated Is it really entrepreneurial? Free market or state control? Within the value chain: who will really make the money as power in the channel shifts over time (producers, transformers, big companies, wholesale distributors, retail sellers)? Analysis goals Identify portfolio strategies Determine investment allocation guidelines Identify the level of risk capital available or the investment requirements for risk capital Assess the risk to the overall portfolio Earnings at risk and equity value implications Credit at risk and downgrade risk implications Iterative process Evaluate current risk capital available Ranking of the investment opportunities Structuring of investment scenarios among business units Strategic Risk Management