Years ago, I attended a course in risk management given by a major bank. Management schooled consultants who worked on risk management systems development, in key business concepts behind the software. Its wholesale International department dealt with loans given to customers worldwide, including large corporates split worldwide which requested funding for new ventures. I am not an economist, but lessons learned on the course fit some patterns we see in the current UK situation, especially country risk..
There are two types of Country risk. One relates to corporate and private sector borrowing, another is for government credit.
The first country risk refers to the uncertainty associated with investing in a particular country, and more specifically the degree to which that uncertainty could lead to losses for investors. This uncertainty can come from any number of factors including political, economic, and exchange-rate.
The second country risk denotes the risk that a foreign government will default on its bonds or other financial commitments increasing transfer risk.”
I will deal with the area of government credit in a second article.
Standard measurements are applied to countries via credit risk rating agencies, such as Moodys, Fitch, or Standard & Poors, with periodic or emergency reviews. Britain once held the top Triple A rating due to what was its strong economy and stable politics. We were demoted to AA due to the uncertainties of Brexit. In 2019, Fitch put the UK on another downgrade warning amidst a ‘no deal’ risk. In March 2020, they reduced our score to AA – with a negative future outlook. Credit rating agencies have different criteria.
Banks employ these ratings but most develop extra in house standards, mine included. Risk rating decides how much risk a bank has for loans to customers, both private and business, by lending for ventures in a country or to a company based in that location.
Country risk specialists tested students with Q&As on a list of countries to gauge our knowledge on their risk levels. Curiously, the most risky of these was Cuba. Much remained unknown about Cuba. The unknown meant more risk as does any form of political instability. Teams of staff would scan newspaper articles on every possible topic relating to a country to compile their own information in addition to using standard ratings.
Brexit uncertainty in 2017-2018 was bad enough. 2019 brought a Johnson majority followed by a pandemic in 2020, factors which are disastrous for our economy precisely when it is ripped out of its closest market, the EU Single Market, our trade partner since 1975.
There’s more. Johnson advocates breaking laws when it suits him. The Cummings’ escapades to Barnard Castle in lockdown, the Cummings/Johnson/Gove Firm established in power after their Vote Leave team broke the law to win the 2016 referendum. Their reins on parliamentary democracy question our political stability: The illegal suspension of Parliament in 2019 was met with disgust by foreign media. Candidates for the general election were mostly chosen as ‘yes men’ who would support the regime, which has weakened parliamentary independence. Johnson engages in ‘government by decree’, We witnessed these measures recently whereby the -Government may pass laws simply by declaring these under emergency measures to stem corona, many of which are incompatible with Human Rights, namely the Corona Virus Act, which allows a council to remove social care provisions from a person without reason. Parliament is not given a say on Brexit negotiations or future trade deals. It was Johnson’s MPs who voted down amendments proposed to give parliament – our elected representatives – a say.
His vast majority has given him what some critics defined as ‘parliament by decree‘ as MPs are instructed to vote for whatever legislation he proposes. We have seen this recently. Parliament is rendered almost toothless.
Scandals uncovered by the Good Law Project, include contracts awarded to companies to provide protective equipment which had no experience in the subject, their associations to the Tory Party considered sufficient basis for business. No public tender existed. This applies to deals on apps, data and Operation Moonshot testing awarded to REVIV, whose board includes Max Johnson, half brother of the Prime Minister.
With masses of power to do what he wishes with democracy and the economy, the behaviour of the Johnson government does not impress risk managers.
Rachel Sylvester wrote on the damage to our reputation abroad in The Times by Johnson’s ‘no deal’ sabre waving and flouting of the law, at a time when we badly need new allies: A European foreign minister described Britain as chaos to a senior Tory, devoid of a reliable regime, the personality of Johnson imposed on our image. Johnson/Cummings have attempted to curb the powers of judicial review, the means lawyers and citizens have to take the Government to court for malicious actions.
The uncertainty and chaos caused by his bare bones deal is another problem. Only this week, plans were revealed to fence off Kent for lorry transit to the EU. Even with a ‘deal’ we leave the Customs Union, causing havoc for manufacturers like Nissan, and huge tariffs. Holyhead will no longer receive shipping transit from Ireland, which will by pass the UK to focus on new routes direct to Europe.
UK based Services companies in translation, IT and more will be hurt by Johnson’s refusal to maintain the level playing field to which he signed up, in regard to GDPR (General Data Protection Regulation). No new business will come without reciprocal standards. These are just some industries. Cummings insistence on escaping the level playing field damages the very tech and digital industries he says he promotes.
Liz Truss recently called on some experts to discourage the Department of Trade and Industry (DTI) from using geographical proximity as a measure for assessing trade deals, which of course led to pessimism about Brexit. She proposed Services should be an example of world trade in this. Yet she ignores conditions for Services, and she is therefore attempting to override the unbiased views of the Civil Service, whose Civil Code requires them to give impartial advice to government. Liz Truss is forcing the situation, rather like the ugly sisters trying to force their feet into Cinderella’s tiny slippers in order to win the handsome prince.
This is hardly a political climate which could attract inward investment. The level playing field with the EU was established to keep up the rule of law, quality and safety. If we wish to visit a friend for a cup of tea and that person has cream coloured carpets, we agree to abide by the house rules and remove our shoes at the door to maintain our friendship. The level playing field is no different as a set of rules we should follow to guarantee fairness and safety. One of these rules will affect British lorry drivers on the Continent. Without the level playing field, British drivers could work longer hours on EU soil than local providers, not only damaging their competitiveness but also rules of road safety on the number of rest breaks they should have. Europe has higher safety restrictions on these.
Britain once attracted foreign inward investment from the world as the gateway to Europe. Andrew Adonis famously sold the North East to Hitachi, which founded Hitachi Europe based here. The constraints of country risk will also prevent banks from financing business ventures in the UK, on top of us losing our role as the gateway to Europe. Britain indeed needs all the allies and friends it can get, which includes inward investment from these global partners.
After the referendum in 2016, requests for corporate establishment and relocation services for companies worldwide in The Netherlands to just one agency increased from 2 per week to 25. Companies opt for EU bases. The Dutch government has encouraged this by establishing a department in the Ministry of Economic affairs to attract financial firms and FinTech to the Netherlands. Any investor who wishes to invest in a venture in the UK faces more scrutiny from banks, even a refusal of loans. Funding for an EU base may be more favourable to lending banks.
The Brexit model once proposed by Farage & Johnson involved remaining in the Single Market/EEA. That would not be as damaging as it is a known business model which would protect our trade.
The Brexit government opted for a blindfold Brexit, a series of unknown unknowns, exactly what risk managers dislike, a massive muddle when coupled with the chaotic corrupt nature of government.