Tough times fuel need for better risk management–IRMSA Risk Report

Corruption is at the top of the list in the Institute of Risk Management South Africa’s (IRMSA) first annual risk report. IRMSA says: “South Africa has steadily been performing worse in Transparency International’s Corruption Perceptions Index, which ranks countries/territories based on how corrupt a country’s public sector is perceived to be. The country is ranked 72nd out of 177 countries surveyed, with a score of 42 out of 100 in the index; this could prove damaging to its reputation.” The South Africa Risks Report 2015 sits within a specific context. IRMSA says the country is still reeling from political and economic turmoil. On 29 July, 2014, the National Union of Metalworkers of South Africa announced the end of a five-month platinum sector strike by 220,000 workers, which had resulted in a decline of nearly 25% in mining production. More bad news came from Standard & Poor’s and Moody’s, downgrading South Africa’s credit rating. The country’s outlook was shifted from stable to negative by Fitch Ratings, meaning the country is now a single notch away from junk status.hideThe report adds: “The South African government continued to experience difficulties to meet the expectations of the population in terms of the fight against unemployment, poverty and corruption, potentially giving rise to increased social instability. The International Monetary Fund (IMF) slashed its economic growth forecast for South Africa by 0.3 percentage points to only 1.4% for 2014 and by 0.4 percentage points to 2.3% for 2015, suggesting the sustainability of the country’s economy is under severe pressure.” The Risk Report concludes: “These events indicate South Africa is in no position to deal with further unforeseen shocks in the near term, considering its resilience and ability to cope with new challenges is being increasingly compromised.” It also warns: “A key characteristic of these events is their systemic nature, implying they have the potential to affect the entire country, as opposed to compartmentalising their sphere of influence according to national, regional, provincial and municipal levels.” Understanding risks The report represents an evaluation of the country’s top risks across two years, through several workshops at IRMSA conferences and a survey of 620 of the country’s foremost risk management experts. IRMSA believes: “A greater understanding of the risks in this regard should lead to a more accurate evaluation of the risks in the South African environment.” The report has been created within the context of the latest World Economic Forum’s (WEF) Global Risks report, which examined 31 global risks in five categories, namely economic, environmental, geopolitical, societal and technological risks. The IRMSA South Africa Risks Report 2015 shows the prioritisation of the top 10 South African risks for 2015, which were evaluated in the survey as having the highest perceived likelihood and potential consequence in the next two years. Six risks appear on both the likelihood and consequence top 10 lists. The geopolitical risk of increasing corruption is at the top of the pile of risks affecting the South African landscape. It has both the highest likelihood and consequence rating for the entire risk profile. Structurally high unemployment/underemployment is next and is particularly relevant in the South African context when coupled with another top 10 risk of severe income disparity. According to Statistics South Africa, the unemployment rate is around 25%, which translates into approximately 5.2 million unemployed persons. When compared to larger African countries, South Africa has the most developed democracy and has the largest economy after Nigeria; yet, in spite of this, it is among the most unequal in terms of income equality. Because South Africa is a developing middle-income country, the risk of failure or shortfall of critical infrastructure features high on the priority list. The report warns: “Considering this is a key requirement for economic growth, the impact of this risk is significant for the country. South Africa is becoming increasingly exposed to technological risks, especially the escalation in large-scale cyber attacks coupled with a breakdown of critical information infrastructure and networks.” The South Africa Risks Report 2015 demonstrates the country is not isolated from the increasingly interdependent and rapidly evolving global risks landscape. However, the report authors stress: “In saying that [there is] a recognition that the country does not operate in a vacuum, we do not suggest the prioritisation of its risk profile should mirror the global risks profile. In fact, global risks are viewed as South Africa’s external context that interacts with the country’s unique internal environment.” Top risks The South Africa Risks Report 2015 makes a comparison between South African and WEF respondents’ views. South African respondents are most concerned with economic risks as opposed to the environmental risks that dominate the attention of WEF respondents. In each case, three out of the remaining four risk categories are evenly spread across the respective risk profiles, with societal and technological risks receiving equal focus on both sides. The report states: “It is fascinating to see that geopolitical risks are very important to South African respondents from a rating perspective, but they do not appear on the WEF top 10 list, whereas environmental risks, which are prioritised by WEF respondents, do not appear at all on the South African top 10 list by likelihood and consequence. This demonstrates the unique nature of the South African risk landscape.” The WEF five risk categories are: Economic risks: Risks in the economic category include fiscal and liquidity crises, failure of a major financial mechanism or institution, oil price shocks, chronic unemployment and failure of physical infrastructure on which economic activity depends. Environmental risks: Risks in the environmental category include natural disasters, such as earthquakes and geomagnetic storms, and man-made risks, such as collapsing ecosystems, freshwater shortages, nuclear accidents and failure to mitigate or adapt to climate change. Geopolitical risks: The geopolitical category covers the areas of politics, diplomacy, conflict, crime and global governance. These risks range from terrorism, disputes over resources and war to governance being undermined by corruption, organised crime and illicit trade. Societal risks: The societal category captures risks related to social stability—such as severe income disparities, food crises and dysfunctional cities—and public health, such as pandemics, antibiotic-resistant bacteria and the rising burden of chronic disease. Technological risks: The technological category covers major risks related to the growing centrality of information and communication technologies to individuals, businesses and governments. These include cyber attacks, infrastructure disruptions and data loss. Context: South African risk The annual IRMSA Conference, which took place in September 2014, was used as a platform to identify the risks that are specifically relevant to South Africa despite not being explicitly surveyed. Seven additional risks were raised—in no particular order—spanning the societal, technological and economic risk categories: Skills shortage: Although many contest its nature and extent, South Africa’s skills shortages are widely regarded as a key factor preventing the achievement of targeted growth rates. Adcorp, the labour market specialist, attributes South Africa’s skills shortage to emigration of highly skilled workers, immigration restrictions for highly skilled foreigners and an education system that is not responding adequately to the demands of the workplace. The CGF Research Institute states that overly prescriptive regulation and the lack of a skilled workforce are considered to be two of the most significant business growth inhibitors in South Africa, with clear and direct impact on employment. According to the institute, 38% of South African business executives state overregulation (and red tape) as a major cause for limited growth, while 36% of business owners indicate that lack of skills is constraining their expansion plans. Increasing strike action: South Africa is still recovering from a historic mining workers’ stoppage that left the economy reeling. The unprecedented five-month dispute took place in the platinum mining sector and involved 220,000 workers. In response, South Africa has opened the door to a change in labour laws that would limit the power of the unions to strike. Between 2008 and 2014, South African workers have already lost substantial amounts in wages due to strikes and rolling mass actions. Interestingly, the Department of Labour’s latest annual industrial action report shows R6.7bn in wages were lost in 2013, while the figure was R6.6bn the previous year. Ebola virus outbreak: At the time of writing this report, an Ebola virus outbreak had hit several countries in west Africa (Guinea, Liberia and Sierra Leone), with limited cases reported in Mali, Nigeria, Senegal and the Democratic Republic of Congo. Not only is this the largest Ebola outbreak ever reported, both in terms of case numbers and geographical spread, but it is also the first time the disease has reached the large cities in the affected countries. The world also witnessed the unprecedented transmission of Ebola outside of Africa, in the US and Spain respectively. In theory, an outbreak in South Africa is just a plane flight, boat or bus ride away, considering that it receives a regular influx of visitors from west Africa. Whether South Africa can create a barrier to the entry of Ebola remains to be seen; the country does, however, arguably have better resources and capacity to contain the virus than most of its African neighbours. Insufficient electricity supply: South Africa continues to struggle with power supply constraints, forcing heavy investment in the construction of new power stations and the diversification of energy sources. As a result, banks have become more averse to lending to investors in energy-intensive sectors. The country’s inability to increase long-term investment will limit economic growth. Eskom currently supplies about 95% of South Africa’s electricity and approximately 45% of Africa’s and is under pressure to respond to the region’s rapidly growing demand for electricity. Eskom has a long-term plan to expand generating capacity by more than 40%, while facing a R225bn funding shortfall until 2018. South Africa can expect electricity supply shortages and above-inflation price increases for another five years before a reliable supply of electricity becomes possible again. Lack of innovation: According to the Human Sciences Research Council, in order to be competitive in the global economy, it is critical for organisations, industries and countries to innovate. According to the latest report by the WEF, South Africa ranks in 56th place out of 144 countries in terms of its business and innovation environment, slipping from 53rd in 2013 and 52nd in 2012. South African executives surveyed as part of GE’s (formerly General Electric) fourth global innovation poll, on the other hand, are fairly upbeat about the state of innovation in the country. The GE Global Innovation Barometer results were presented at the SA Innovation Summit in Cape Town on 16 September, 2014, after more than 3,000 senior executives across 20 countries were surveyed—including 100 in South Africa. Only 34% of South African respondents thought enough financial support was being provided by the government to support innovative companies and 92% of respondents felt educational curricula needed to be better aligned with the needs of business. On a positive note, 88% agreed that collaborating with small and medium-sized enterprises and startups would drive innovative success in the future and 66% indicated that it was essential to use the intelligence gained from big data to innovate successfully. (Big data refers to the collection and analysis of large volumes of information from customer interactions or electronic sensors to produce useful information.) Significant finger-pointing takes place when trying to explain the country’s perceived lack of innovation. For example, business leaders argue that Science and Technology Minister Naledi Pandor has in the past blamed South African universities for their alumni’s lack of innovation in different industries. The difficulty in finding venture capital is another reason often used to explain why local research companies battle to develop their inventions commercially. Other reasons include inadequate education, poorly qualified personnel and a market dominated by established businesses that would rather play safe and maintain market share than innovate and risk losing face. Economic slowdown: The South African economy is struggling to achieve the required traction in order to make the much-needed dent in the high unemployment rate. The IMF recently slashed the country’s economic growth forecast for 2014 by 0.3 percentage points to only 1.4% and its forecast for 2015 stands at 2.3%. In response to these economic constraints, and serving as a guide to spending, the South African government developed the Medium-Term Strategic Framework. Guided by the National Development Plan, it sets out its priorities and key targets for the next five years. Some of the key priorities include creating an inclusive economy that grows by more than 5% a year, with higher employment and better export competitiveness. Finance Minister Nhlanhla Nene believes South Africa’s growth is likely to be slower than expected, but does not expect the economy to slip into recession. Several global factors also contribute to the current economic climate, including China’s slowdown, falling oil prices and the expected tightening of monetary policy in the US. Banking reputational risk: Gary Allemann, Managing Director at Master Data Management, says that apart from macroeconomic reasons, there is a serious lack of trust in the compliance culture of the South African banking system following the recent failure of African Bank and Moody’s subsequent downgrading of all the country’s banks. In the past few years, African Bank has transgressed the National Credit Act on more than 200 occasions. The onus is on South African banks to restore international trust following African Bank’s many misdemeanours. As can be expected, the major banks have assured stakeholders of their robustness and hopefully this will also provide comfort to foreign investors.

Tough times fuel need for better risk management–IRMSA Risk Report

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