Sunday, April 13, 2008

Ruining risk ratings

The biggest risk today are the risk rating agencies themselves

What is the correlation between political risk and poor investment climate? This question was shot to me during my recent meeting with the head of research of one of the leading banks of Bahrain. The gentleman, a Sudanese resident was perplexed with the fact that why is it most of the globally recognised rating agencies, who mostly are based out of the developed world, rate Sudan on a high risk category for investments. Their logic – political risks are supreme in determining for any country!! On this pretext he had literally gone ahead in terms of empirically challenging the fact that there cannot be any correlation between political risk and investments. His argument – If political risks were to effect the investments then the likes of Indian economy would not have grown like the manner it has grown over the past five to six years.

After the meeting, while coming back I thought that there is a definite merit to his argument and developed a strong conviction that actually over a period of time, political risks actually does not have much effect on investments climate!! In fact a classical example has been the country to which this gentleman himself belonged – Sudan. For the past five years Sudan has been bleeding with ethnic conflicts, particularly in the western region of Darfur. In these five years, according to some estimates some 200,000 people have died and a staggering 2.5 million people have been displaced. Worst, is the fact that the conflict does not seem to end even in the near future. Without going into the details as to who had been responsible for such mass scale genocide in that country, the most striking feature is that even amidst such a perennial crisis, the economy had been clocking a decent growth rate!! In fact for the last two years i.e. 2006 and 2007 the economy grew by a whopping 12% and 11% respectively.

Historically, it has been observed that if trade and investments have caused conflicts around the world, the only panacea to it had been trade and investments itself. As in the case of Sudan, the primary reason of the conflict is perpetual drought, manifesting to productive disengagement for millions, coupled with explosive growth in population, which has further added to the crisis. And in the given environment other than multi-lateral interventions which are ceremonial and critical in their own ways, the region is in dire need of loads of investment, which can actually bail out the citizens of this region and country from their perpetual misery!

And there should not be any impediment for investments to flow in, particularly when the economic growth is clocking a double digit! But then the irony is, investors across the world still shy away from Sudan – the reason? Such risk ratings awarded by the various ‘globally reputed agencies’, which are unfortunately treated almost, like a commandment by the investing community. So in the given scenario, if there is actually a risk for any nation, then it is from the media propaganda and the cartel of manufactured global risk and ranking modelling mechanism and not from anything else!!


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