TABLE OF CONTENTS

Part 1 Introduction to Political, Country, and Organizational Risk 2

Reported by Cordenete, Aubrey Ashley

Part 2 Understanding Political and Sovereign Risk in Emerging Markets 5

Reported by Andor, Mohammad Alqaf

Part 3 The Role of Credit Default Swaps as a Measure of Country Risk 9

Reported by Ustares, Edda Mae

Part 4 Trends in International Risk Management and Implications for Transfer Risk 12
Reported by Taladro, Moschino

Part 5 Regulatory Risk and Its Impact on Investment Decisions 15

Reported by Vargas, Frencis Erika

Part 6 Operational Risk and Its Challenges for Firms 19

Reported by Carbrera, Kaye

Part 7 Organizational Implications of Operational Risk Management 23

Reported by Cunanan, Nicko

Part 8 Risk-Reward Analysis 25

Reported by Cervantes, Frances Avryl

Key Takeaways 27

References 29

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PART 1: INTRODUCTION TO POLITICAL, COUNTRY,
AND ORGANIZATIONAL RISK

Businesses, governments, and organizations must develop more diverse

strategies to manage risks in today's interconnected world. Different risks are present,
which can affect every organization's decision-making, interfere with their operations,
and might as well threaten their long-term stability. Political, country, and organizational
risks are the most important of these since they influence organizational efficiency, laws
and regulations, and economic situations. The difficulties caused by managerial, political,
and country risks become more complex as technological developments continue to
transform businesses and global economies and become more interdependent. In a
rapidly changing environment, it is crucial to understand and manage these risks to
ensure sustainable growth and maintain a competitive edge in an uncertain business
world.

This discussion will focus thoroughly on political risk, country risk, and
organizational risk. Thus, by knowing these risks, we'll be able to understand how they
affect the decisions of every investor, how different firms adapt to them, and how the
market can emerge with the presence of these risks. These risks are all significant as they
can influence a firm's operation, financial stability, and long-term sustainability.

PART 1.1. DEFINITION AND SCOPES OF POLITICAL RISK, COUNTRY RISK, AND
ORGANIZATIONAL RISK

A. POLITICAL RISK
Imagine a foreign company investing in a country with a stable economy and
favorable business policies. However, a sudden change in government (an election
happened) led to new regulations that imposed higher taxes on foreign businesses and
stricter trade restrictions (higher tariffs and quotas). As a result, that specific foreign
company faces increased costs, reduced profits, and uncertainty about their future
operations or investments.

Political risk refers to the possible negative impact on investment returns due to
political instability or changes within a country. This fluctuation may arise from shifts in
government, legislative bodies, foreign policies, military control, conflicts, regime
changes, or alterations in international relations, business laws, and investment
regulations. Moreover, it is also known as geopolitical risk and is considered a type of
jurisdiction risk. Its significance increases over more extended investment periods.

Example:
Boracay Closure in 2018. Under the governance of former President Rodrigo Duterte, led
by Department of Environment and Natural Resources (DENR) Secretary Roy Cimatu,
together with the Department of the Interior and Local Government (DILG) and the
Department of Tourism (DOT). The closure of Boracay which is one of the well-known
tourist spots in the Philippines significantly affected the businesses, investors, and
workers.

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TYPES OF POLITICAL RISK:
1. War, terrorism, and civil unrest
- A kind of political risk map. It refers to violent conflicts that disrupt societal
stability, government functions, and economic activities. These events can
lead to widespread destruction, loss of lives, and significant political and
financial uncertainty.
- Examples:
a. Marawi Siege
b. Russia and Ukraine War

2. Unilateral decision made by a state-owned entity

- Refers to an action or policy implemented by a government-controlled
organization without consulting or seeking approval from other
stakeholders, private businesses, foreign investors, or international bodies.
- Examples:
a. ABS-CBN
b. Jeepney Modernization

3. Geopolitical decisions made by governments

- Actions or policies implemented by a country’s leadership that influence
international relations, global trade, security, or political alliances.
- Examples:
a. Philippines distancing from US (Strengthening ties with China and
Russia instead)
b. Philippine alliance with US (BBM)
4. Sanctions
- These are the economic, political, or military restrictions imposed by one
country. Some of the examples of sanctions are trade restrictions, asset
freezes, travel bans, and diplomatic isolation.
- Example:
a. Banning POGO Operations
b. Philippine Government sanctions on terrorist groups
5. Jurisdictional risk
- Refers to the potential risks that businesses, investors, or individuals face
due to the legal, regulatory, and political environment of a particular
country or region.
- Example:
a. Mining

SCOPES OF POLITICAL RISK:

● Government policy changes
● Political instability

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 ● Expropriation and nationalization
● Geopolitical tensions and conflicts
● Corruption and bureaucracy
● Legislation and Regulations

B. COUNTRY RISK
Country risk is the uncertainty associated with investing in a particular country,
and more specifically the degree to which that uncertainty could lead to losses for
investors. Country risk can come from any number of factors including political,
economic, exchange-rate, or technological influences. In a broader sense, country risk is
the degree to which political and economic unrest affect the securities of issuers doing
business in a particular country.

It is said that this risk is critical to consider when investing in less-developed

nations. Given the fact that it can affect the financial market and can also reduce the
expected return on investment (ROI) of securities being issued within such countries, or
by companies doing business in such countries. Thus, it is an important factor for
investors and businesses to consider, as it can impact economic stability, investment
returns, and overall business operations in a given country.

Examples:

a. Depreciation of Philippine Peso against US Dollar (2022)

- Increased US product imports and inflation. Foreign investors
became more cautious as well.
b. Economic Slowdown
- A big factor of this is inflation. Higher cost of goods and services
that resulted in lowering the purchasing power of consumers.

SCOPES OF COUNTRY RISK:

● Economic risk
● Political risk
● Social risk.
● Legal and regulatory risk
● Environmental Risk
● Financial Risk

B. ORGANIZATIONAL RISK
Business owners strive to identify and understand the risks involved with their
business and industry, both internal and external, so that they can better plan how to
handle them if they arise. Organizational risk is a broad concept that encompasses many
different types of risks. These risks can fall into three main areas: strategic, operational,
and financial.

Organizational risk is anything that generates uncertainty within an enterprise. IT

is the potential of an organization to suffer losses due to an unexpected event or activity.
Business leaders concern themselves with organizational risk because it has a direct

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impact on the financial stability of their business. Moreover, organizational risk includes
financial losses, compliance issues, operational disruptions, and reputational damage.

SOME COMMON EXAMPLES:

a. Product launch
b. Communication
c. Cybersecurity
d. Brand Fatigue
e. Regulation compliance
f. Natural disasters

Examples:
a. Financial Mismanagement (PhilHealth Issue)
b. Data Breach (Comelec Data Leaked - 50 million voters information)

SCOPES OF ORGANIZATIONAL RISK:

● Operational Risk
● Financial Risk
● Compliance and Legal Risk
● Reputational Risk
● Strategic Risk
● Human Resource Risk

Organizational, country, and political risks are interrelated and affect the stability
and success of organizations and businesses. Government policies and political
instability can result in country risk that impact regulatory frameworks, investment
conditions, and economic situations. Organizations are therefore impacted by these
wider uncertainties, which put them at risk of financial losses, business interruptions, and
harm to their reputation. Developing effective solutions to reduce the impact of these
risks, maintaining adaptability, and promoting long-term growth in an unpredictable
environment all depend on an understanding of how these risks intersect.

PART 1.2. IMPORTANCE OF RISK ASSESSMENT IN EMERGING MARKETS

Risk assessment is essential in emerging markets to guarantee stability,
sustainability, and expansion for investors and companies. Because of their undiscovered
resources, growing consumer demand, and quick economic progress, these markets
frequently provide profitable chances. Emerging markets, however, also have a number
of serious risks, such as political risk, country risk, and organizational risk. Businesses and
investors may anticipate possible threats, create efficient strategies, and make
well-informed decisions by carrying out a thorough risk assessment. Organizations may
improve resilience, protect investments, and optimize long-term success in dynamic and
changing market situations by understanding and minimizing these risks.

Emerging markets, which represent 85% of the world’s population but only about
13% of the global equity market cap, are economies often growing at a faster rate than
more developed countries such as the U.S., England and Canada.

1. Importance of Political Risk Assessment

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 ● Anticipate policy shifts that could impact operations and profitability.
● Avoid investment losses due to government intervention or nationalization.
● Develop plans for civil unrest, protests, or geopolitical tensions.

2. Importance of Country Risk Assessment

● Evaluate currency stability and inflation to minimize financial losses.
● Assess legal frameworks to ensure contract enforceability and intellectual
property protection.
● Understand socioeconomic conditions that may impact consumer demand and
workforce stability.

3. Importance of Organizational Risk Assessment

● Operational inefficiencies due to inadequate infrastructure and unreliable supply
chains.
● Regulatory compliance challenges as companies adapt to evolving laws and
governance standards.
● Reputational risks stemming from associations with corrupt business practices or
unethical labor conditions.

PART 1.3. KEY DIFFERENCES BETWEEN POLITICAL RISK, COUNTRY RISK, AND
ORGANIZATIONAL RISK

Aspect Political Risk Country Risk Organizational Risk

DEFINITION Risk arising from government Risk related to a country’s Risk arising from internal or
actions, political instability, or economic, social, and legal external factors that affect an
policy changes affecting environment that impacts organization’s ability to operate
businesses. businesses and investments. efficiently.

SCOPE Primarily linked to government Broader in scope, covering Focuses on an organization’s

decisions, political events, and economic, financial, legal, and internal structure, processes,
regulatory changes. social conditions in a country. and external operational
challenges.

CAUSES Government instability, policy Economic crises, inflation and Poor corporate governance,
changes, civil unrest, trade currency fluctuations, legal compliance failures, supply
restrictions, expropriation. uncertainties, corruption, chain disruptions, cybersecurity
infrastructure issues. threats, reputation damage.

IMPACT ON Loss of investments due to Profits are difficult to return, Operational inefficiencies
BUSINESSES nationalization or expropriation, market fluctuations impact leading to revenue loss,
increased operational costs due financial stability, and non-compliance with
inadequate regulation causes
to regulatory shifts, business regulations resulting in fines,
disagreements between
disruptions from political unrest. businesses. reputational damage reducing
customer trust.

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PART 2: UNDERSTANDING POLITICAL AND
SOVEREIGN RISK IN EMERGING MARKETS

PART 2.1. DEFINITION & CAUSES OF POLITICAL RISK

Political Risk is a factor multinational companies need to consider when operating
in emerging markets. Their host governments can with the swing of a pen transform a
multimillion dollar investment into a huge loss. With the opening of more emerging
markets to foreign direct investment, the traditional approach of political risk studies to
bargain over entry becomes obsolete. Political Risk is also the risk an investment's returns
could suffer as a result of political changes or instability in a country. Instability affecting
investment returns could stem from a change in government, legislative bodies, other
foreign policymakers or military control. Political risk is also known as "geopolitical risk,"
and becomes more of a factor as the time horizon of investment gets longer.

CAUSES OF POLITICAL RISK

1. Political Instability and Regime Change - Emerging markets frequently

experience political instability, including electoral disputes and civil unrest. These
events can disrupt economic activity, undermine investor confidence and lead to
policy uncertainty. Changes in government can also pose risks, as new
administrations may implement policies that differ significantly from their
predecessors, potentially affecting existing contracts and business operations.
2. Weak Institution and Governance - Emerging markets often have weak or
underdeveloped institutions, including the judicial system, regulatory bodies, and
law enforcement. This can lead to corruption, lack of transparency, and inefficient
governance, making it difficult for businesses to operate and investors to feel
secure. Poor corporate governance practices can also exacerbate political risk, as
it can lead to conflicts of interest, mismanagement, and a lack of accountability
3. Economic Viability - Emerging markets are often highly dependent on a few key
industries, such as natural resources or agriculture. This makes them vulnerable to
global commodity price fluctuations and external economic shocks. High levels of
debt and limited access to capital can also exacerbate economic vulnerability,
making it difficult for governments to respond effectively to crises.
4. Lack of Transparency and Accountability - Emerging markets may lack
transparency and accountability in their government operations and financial
markets. This can make it difficult for investors to assess risks and can lead to
corruption and mismanagement.
5. Social and Political Tensions - Emerging markets often face social and political
tensions related to income inequality, ethnic conflicts, religious differences, and
unemployment. These tensions can escalate into protests, riots, or even violent
conflicts, creating a volatile environment for businesses and investors.

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PART 2.2. SOVEREIGN RISK AND ITS IMPACT ON FOREIGN INVESTMENTS

Sovereign Risk is a country’s probability of missing a debt obligation in its present

economic status. It is the potential that a nation's government will default on its
sovereign debt by failing to meet its interest or principal payments. This risk comes in
many forms and poses a considerable challenge to the banking system and a country’s
financial stability in general.

THE IMPACT OF SOVEREIGN RISK TO FOREIGN INVESTMENTS

● Default on Debt - A country may default on its sovereign debt, either by failing to
make timely payments or by restructuring its debt, potentially reducing the value
of bonds held by foreign investors.
● Changes in Foreign Exchange Regulations - A government may alter its foreign
exchange policies, potentially devaluing its currency and impacting the value of
foreign exchange contracts held by investors.
● Political Instability - Political turmoil or instability can create an unpredictable
environment for foreign investors, making it difficult to assess the long term
viability of their investments.
● Nationalization - Governments may nationalize industries or businesses,
expropriating assets owned by foreign investors and potentially leading to
significant financial losses.

PART 2.3. REAL LIFE EXAMPLES OF POLITICAL RISK FROM EMERGING MARKETS

Russia Oil Company Case

Consider the case of Venezuela during the early 2000s. The government, led by
President Hugo Chávez, nationalized several foreign-owned assets, including oil
companies. Corporations faced the risk of losing their investments overnight. Companies
operating in such environments must assess expropriation risk and develop contingency
plans. In Russia, the oil company Yukos faced contractual risk when the government
accused it of tax evasion. The subsequent legal battle led to bankruptcy and the eventual
takeover of its assets by state-owned entities. Understanding the legal framework and
ensuring robust contracts are essential for managing contractual risk.

Nigeria’s Oil Industry

Nigeria, a major oil producer, grapples with security risks, pipeline vandalism, and
political instability. Companies like Shell and Chevron have faced attacks on their
facilities, disrupting operations. robust security measures, community engagement, and
political lobbying are essential for managing risks in the Nigerian oil sector.

Turkey’s Geopolitical Tensions

Turkey's geopolitical tensions with neighboring countries impact investor
confidence. The 2018 diplomatic crisis with the United States led to currency
depreciation and market volatility. Diversifying investments across regions and
monitoring geopolitical developments are crucial.

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PART 3: THE ROLE OF CREDIT DEFAULT SWAPS AS A
MEASURE OF COUNTRY RISK

PART 3.1. CREDIT DEFAULT SWAPS

A Credit Default Swap (CDS) is a financial derivative that allows an investor to
offset or swap their credit risk with another investor. Essentially, it's like insurance for
lenders or bondholders.
● The buyer of the CDS pays regular premiums to the seller.

● In return, the seller agrees to compensate the buyer if the borrower

defaults on their debt or loan.

CDSs are commonly used in bond markets and corporate debt protection. They can help
hedge against credit risk, provide liquidity in the credit market, and diversify risk
exposure. However, they also carry risks, such as market volatility and the possibility of
the seller defaulting on their obligations.
PART 3.2. USES OF CREDIT DEFAULT SWAPS
1. Hedging Credit Risk: Investors use CDSs to protect themselves against the risk of
a borrower defaulting on a loan or bond. For instance, a bondholder might
purchase a CDS to ensure compensation if the bond issuer fails to meet their
obligations.
2. Speculation: Traders may use CDSs to bet on the creditworthiness of a company
or country. If they believe a borrower is likely to default, they might buy a CDS to
profit from the increased risk.

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 3. Arbitrage: CDSs can be used to exploit price differences between related financial
instruments, such as bonds and their associated CDS contracts.
4. Portfolio Diversification: Financial institutions may use CDSs to spread out their
credit exposure and reduce the risk of concentrated losses.

PART 3.3. ADVANTAGES AND DISADVANTAGES OF CREDIT DEFAULT SWAPS (CDSS)

PROS:
1. Risk Management: CDSs allow investors to hedge against the risk of
default, providing a safety net for bondholders and lenders.
2. Encourages Investment: By mitigating credit risk, CDSs enable investors to
fund ventures that might otherwise be considered too risky, fostering
innovation and economic growth.
3. Liquidity: CDSs contribute to liquidity in the credit market, making it easier
for institutions to manage their portfolios.
CONS:
1. Complexity: CDSs are intricate financial instruments that can be
challenging to understand and manage.
2. Systemic Risk: Mismanagement or excessive speculation with CDSs can
lead to financial instability, as seen during the 2008 financial crisis.
3. Regulatory Concerns: Historically, CDSs were largely unregulated, which
increased the risk of sellers defaulting on their obligations.

PART 3.4. HOW DOES CREDIT DEFAULT SWAPS (CDSS) REFLECT A COUNTRY'S
CREDITWORTHINESS AND RISK?
1. Sovereign CDS Spreads: The cost of a CDS on government debt indicates the
perceived risk of default or restructuring. Higher spreads suggest greater risk and
lower creditworthiness, while lower spreads imply stability and reliability.
2. Investor Sentiment: CDS prices are influenced by market confidence in a
country's economic and political stability. Rising CDS costs may signal concerns
about fiscal policies, debt levels, or geopolitical issues.
3. Comparative Analysis: CDS spreads allow investors to compare the credit risk of
different countries, aiding in resource allocation decisions.

EXAMPLE OF CREDIT DEFAULT SWAP USAGE IN EVALUATING RISK IN EMERGING

MARKETS
● Investor A is considering investing in bonds issued by Country B, an emerging
market economy. To evaluate the risk, Investor A examines the CDS spread for
Country B’s sovereign debt. A high CDS spread indicates greater perceived risk of
default, while a low CDS spread suggests stability. If the CDS spread rises

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 significantly, Investor A may decide to hedge their investment by purchasing a
CDS contract, ensuring protection in case of default.
● Investor C is considering funding Company D, a renewable energy startups in an
emerging market. Since startups often lack a long financial track record, Investor
C wants a way to assess risk before making an investment. Investor C examines
who is willing to provide CDS protection on Company D. If major financial
institutions are offering CDS contracts for Company D, it may indicate confidence
in the company’s ability to succeed. If only smaller or specialized firms are
providing CDS protection, it could suggest higher perceived risk and uncertainty
in the company’s financial future. If CDS contracts are scarce or unavailable, it
may mean investors view Company Das too risky to insure at all.

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PART 4: TRENDS IN INTERNATIONAL RISK
MANAGEMENT AND IMPLICATIONS FOR TRANSFER
RISK

PART 4.1. EMERGING MARKETS

Emerging markets are countries that are in the process of transitioning from developing
to developed status, characterized by rapid economic growth and industrialization.
Investors are often drawn to emerging markets due to the potential for high returns, but
these markets also carry higher risks. Examples include: Brazil, Russia, India, China
(BRIC), Other nations in Africa, Eastern Europe, Latin America, The Middle East, and
Southeast Asia.

CHARACTERISTICS OF EMERGING MARKETS

● Rapid Economic Growth: Emerging markets often exhibit high rates of economic
expansion.
● Industrialization: They are moving away from traditional economies (like
agriculture) towards manufacturing and industrial activities.
● Urbanization: Urban areas tend to grow rapidly in emerging markets.
● Infrastructure Development: Investment in infrastructure (roads, ports, etc.) is
common.
● Increasing Global Influence: Emerging markets are becoming increasingly
important players in the global economy.

EMERGING TRENDS IN GLOBAL RISK MANAGEMENT STRATEGIES

As businesses and governments grow, they face more risks. Many leaders don’t see these
risks early, and they can turn into big problems. To stay safe, they need to spot and
manage these risks before they cause harm.

Six (6) Emerging Trends in Global Risk Management Strategies:

1. Integration of Advanced Technologies: More organizations are using Artificial

Intelligence (AI) and Machine Learning (ML) to improve how they manage risks.
These tools help analyze large amounts of data to find patterns, spot unusual
activity, and predict future problems. This helps with things like stopping fraud
and boosting cybersecurity.

2. Emphasis on Cybersecurity: As digital transformation speeds up, companies are

paying more attention to cybersecurity. They are using tools like constant
monitoring, threat tracking, and smart data analysis to better protect against risks.

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 3. Supply Chain Resilience: Recent global events have shown weak spots in supply
chains. To fix this, businesses are using more suppliers, adding digital tools like
blockchain for better tracking, and creating backup plans to stay prepared.

4. Focus on Environmental, Social, and Governance (ESG) Factors: People are

asking companies to be more open and responsible. So, organizations are
including environmental, social, and ethical factors (ESG) in their risk plans to deal
with things like climate change and social issues.

5. Adoption of Governance, Risk, and Compliance (GRC) Platforms: Organizations

are adopting GRC platforms to simplify risk management, stay compliant, and
align with their business goals

6. Enhanced Board Involvement: New regulations are pushing company boards to be

more involved in managing cybersecurity risks, which is making organizations
more accountable and transparent in how they handle cyber issues.

TRANSFER RISK

- Transfer risk refers to where a company or investors are unable to convert their
local currency into foreign currency in which they are trying to make transactions
or payment internationally.

WHY ARE THEY UNABLE TO CONVERT?

- Companies and investors are unable to convert because governments imposed
restrictions on the currency to control its trade deficits . where they forecasted
that their currency would inflate when the time comes.

IMPACT ON CROSS-BORDER TRANSACTIONS

- If this scenario continued, many firms would usually be unable to transact in other
countries. Limiting them to expand their profit into foreign currency. This also
includes the following:
● Payment Blockages - Where firms are unable to make payments
internationally due to restrictions and delay payment.
● Investment Barriers - Many large company avoids high risk transfer in the
countries
● Increased Cost - Businesses purchase political risk insurance to protect
them from high risk in which increased their expenses.
● Exchange Rate Losses - Firms incur high losses on their profits when they
forcefully convert their local currency into foreign currency
● Taxation and Repatriation Issues - Double taxation or restrictions on profit
repatriation can reduce the benefits of international trade.

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STRATEGIES OF FIRMS USE TO MITIGATE TRANSFER RISK

These are the strategies of the firms to mitigate the transfer risk:

1. Political Risk Insurance

- Covers losses from government actions that prevent currency conversion
or fund transfer.
2. Use of Hard Currency
- Hard currency refers to a stable, widely accepted, and easily convertible
currency,
3. Contractual Safeguards
- Contractual safeguards are protective measures written into a contract to
reduce risk, prevent disputes, and ensure that both parties follow through
on their responsibilities.
4. Government Guarantees or Stabilization Clauses
- Legal promises made by a government, usually to foreign investors or
companies, to protect them from certain risks, especially in long-term
contracts like infrastructure, mining, or energy projects.
5. Reinvestment of Earnings Locally
- Instead of repatriation of profits, firms reinvest in local operation of assets.

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PART 5: REGULATORY RISK AND ITS IMPACT ON
INVESTMENT DECISIONS

PART 5.1. DEFINITION AND SOURCES OF REGULATORY RISK

Regulatory risk refers to the potential for financial or operational challenges that
arise due to changes in laws, regulations, or policies imposed by government or
regulatory bodies. These changes can impact businesses, industries, or markets by
increasing operational costs, reducing profitability, or altering competitive dynamics. For
instance, new regulations might require firms to adopt costly compliance measures or
adjust their operations significantly.

Effectively managing regulatory risk involves staying informed about regulatory changes,
assessing their potential impact, and implementing strategies to ensure compliance
while minimizing disruptions. This is particularly crucial for businesses in highly regulated
industries, as non-compliance can lead to penalties, fines, or reputational damage.

SOURCES OF REGULATORY RISK

● Government Policies:
○ Changes in government policies, such as new regulations or amendments
to existing laws, can create regulatory risks. These changes can affect how
businesses operate and their compliance requirements.
○ Example: A new data privacy law that requires companies to implement
stricter data protection measures.
● Industry-Specific Regulations:
○ Different industries face unique regulatory risks based on the specific
regulations governing them. For example, healthcare, finance, and energy
sectors are heavily regulated and subject to frequent changes.
○ Example: The finance sector often faces changes in regulations related to
banking practices and financial reporting.
● International Trade Policies:
○ Changes in international trade policies, such as tariffs and trade
agreements, can impact businesses involved in exporting and importing
goods. These changes can affect the cost and feasibility of international
operations.
○ Example: The imposition of tariffs on imported goods can increase costs
for businesses that rely on foreign products.
● Tax Policy Reforms:
○ Reforms in tax policies can directly impact the financial performance of
businesses. Changes in income tax laws, corporate tax rates, and other
tax-related regulations can create regulatory risks.
○ Example: An increase in corporate tax rates can reduce the profitability of
companies.

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 ● Labor Laws:
○ Changes in labor laws, such as minimum wage increases, mandated
vacation, and sick days, can affect the cost structure and operational
efficiency of businesses.
○ Example: New regulations requiring employers to provide paid sick leave
to employees.
● Environmental Regulations:
○ New environmental regulations or changes to existing ones can impose
additional compliance costs on businesses, particularly those in industries
with significant environmental impacts.
○ Example: Regulations limiting carbon emissions can require companies to
invest in cleaner technologies

PART 5.2. HOW FIRMS ASSESS AND ADAPT TO REGULATORY CHANGES

● Analyze Regulatory Updates with Legal Experts:

- Firms collaborate with legal experts to comprehend the implications of
new regulations. These experts help interpret the regulations and
understand how they will specifically affect the business operations.

● Conduct SWOT Analysis:

- Firms perform a SWOT (Strengths, Weaknesses, Opportunities, Threats)
analysis to determine regulatory changes' strategic needs and potential
impacts. This analysis helps in identifying areas of improvement and
potential risks.

● Align Regulations with Business Goals:

- Firms evaluate how new regulations align or conflict with their overall
business goals. This assessment helps determine whether the regulatory
changes create opportunities or threats to their strategic objectives.

● Analyze Historical Data and Market Trends:

- Using historical data and market trends, firms predict the potential impact
of regulatory changes. This approach allows them to anticipate market
reactions and adjust their strategies accordingly.

● Identify Compliance Costs and Savings:

- Firms assess the costs associated with complying with new regulations
and potential savings from avoiding penalties for non-compliance. This
evaluation helps in budgeting and financial planning.

ADAPTING TO REGULATORY CHANGES

● Adapt Strategies to Regulatory Changes:
- Firms adjust their business strategies to align with new regulations. This
alignment ensures that they remain compliant while also seeking strategic
opportunities presented by the changes.

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 ● Establish a Cross-Functional Regulatory Team:
- Firms create a team from various departments to monitor and manage
regulatory changes effectively. This team ensures that all aspects of the
business are considered when responding to new regulations.

● Invest in Regulatory Technology Solutions:

- Firms implement technology solutions to streamline compliance
processes. Regulatory technology (RegTech) helps them stay updated with
regulatory changes and manage compliance efficiently.

● Stay Informed and Anticipate Changes:

- Firms continuously monitor regulatory developments and anticipate
potential changes. Staying informed allows them to proactively address
regulatory risks and adjust their strategies in advance.

PART 5.3. EXAMPLES OF REGULATORY SHIFTS

Recent Regulatory Changes in the Philippines

1. Anti-Terrorism Act of 2020:

○ Affected Companies: Various businesses, especially those in the
technology and communication sectors, are impacted by the increased
surveillance and data retention requirements. Companies like
telecommunications providers and internet service providers need to
comply with stricter regulations to monitor and report suspicious activities.
○ Example: Telecommunications companies like PLDT and Globe are
required to retain and monitor user data more strictly. They must
implement advanced surveillance systems to comply with the increased
regulatory requirements. This means higher operational costs and potential
changes in their data privacy policies to ensure compliance.

2. Universal Health Care Act:

○ Affected Companies: Healthcare providers, insurance companies, and
pharmaceutical firms are significantly affected. They need to align their
services and products with the new healthcare policies to ensure that all
Filipinos have access to comprehensive health services.
○ Example: Healthcare providers like The Medical City and insurance
companies such as PhilHealth need to expand their services to cover all
Filipinos. They must adjust their service offerings and pricing models to
align with the new health care policies, ensuring that comprehensive health
services are accessible to everyone.

3. Minimum Wage Increase:

○ Affected Companies: Businesses across all sectors, particularly those
employing low-wage workers, are impacted by the recent wage hikes.

17
 Companies in the retail, manufacturing, and service industries need to
adjust their payroll budgets to comply with the new minimum wage
regulations.
○ Example: Small and medium enterprises (SMEs) in the retail and service
industries, like local restaurants and shops, need to adjust their payroll
budgets to comply with the new minimum wage regulations. This may lead
to increased labor costs and could impact their pricing strategies to
maintain profitability.

International Examples

1. General Data Protection Regulation (GDPR) - European Union:

○ Affected Companies: Global tech giants like Google, Facebook, and
Amazon have had to overhaul their data privacy practices to comply with
GDPR. This regulation affects any company handling the personal data of
EU citizens, regardless of where the company is based.
○ Example: Global tech companies such as Google and Facebook have had
to overhaul their data privacy practices to comply with GDPR. This
includes obtaining explicit consent from users before collecting their data,
ensuring data portability, and implementing stringent data protection
measures to avoid hefty fines
2. China's Cybersecurity Law:
○ Affected Companies: International companies operating in China, such as
Apple and Microsoft, are required to store data locally and comply with
stringent cybersecurity measures. This law impacts how these companies
manage and protect user data within China
○ Example: Companies like Apple and Microsoft operating in China are
required to store data locally and comply with stringent cybersecurity
measures. They must invest in local data centers and enhance their
cybersecurity protocols to ensure that user data within China is secure and
compliant with the regulations.

18
PART 6: OPERATIONAL RISK AND ITS CHALLENGES
FOR FIRMS

PART 6.1. OPERATIONAL RISK

Operational risk focuses on how things are accomplished within an organization,
not necessarily what is produced or inherent within an industry. These risks are often
associated with active decisions relating to how the organization functions and what it
prioritizes. While these risks don’t always lead to failure, reduced production, or
increased costs, their severity is influenced by internal management decisions. Because
it reflects man-made procedures and thinking processes, operational risk can be
summarized as a human risk; it's the risk of business operations failing due to human
error. It changes from industry to industry and is an important consideration when
making potential investment decisions. Industries with lower human interaction are likely
to have lower operational risk.

PART 6.2. TYPES OF OPERATIONAL RISK

1. Process Risk
a. Risks related to the efficiency and effectiveness of internal processes.
Examples include:
● Errors or delays in processing transactions
● Inadequate procedures for handling customer complaints
● Supply chain breakdowns
● Failures in internal controls
b. Identification Methods:
● Process mapping
● Root cause analysis
● Internal audits and evaluations of workflows
c. Mitigation Strategies:
● Process improvement initiatives
● Implementation of automated solutions (e.g., AI)
● Documentation of processes for oversight
● Staff training and development
● Technology adoption to reduce slowdowns and outages
2. Strategic Risk
a. Risks arising from business decisions and strategic initiatives, such as:
● Mergers and acquisitions
● New product launches
● Brand repositioning
b. Identification Methods:
● SWOT analysis (Strengths, Weaknesses, Opportunities, Threats)

19
 ● PESTLE analysis (Political, Economic, Social, Technological, Legal,
Environmental)
● Scenario planning
● Market and competitive landscape analysis
c. Mitigation Strategies:
● Business diversification
● Strategic partnerships
● Investment in innovation and R&D
● Risk transfer mechanisms (e.g., insurance)
● Building a strong risk-aware culture
3. External Events Risk
a. Risks from external, uncontrollable events, such as:
● Natural disasters
● Political instability
● Financial system failures
● Regulatory changes
● Pandemics
b. Identification Methods:
● Environmental scanning
● PESTLE analysis
● Monitoring economic and political trends
● Scenario planning
c. Mitigation Strategies:
● Development of contingency and crisis management plans
● Business continuity planning
● Diversification of operations and supply chains
● Strong stakeholder relationships
● Use of insurance and other risk transfer mechanisms

PART 6.3. HOW FIRMS IDENTIFY AND MITIGATE OPERATIONAL RISK

IDENTIFYING OPERATIONAL RISK

This involves systematically analyzing various aspects of a business to uncover potential
threats that could impact day-to-day operations. This proactive approach helps
businesses develop strategies to mitigate risks before they escalate.

COMMON IDENTIFICATION METHODS:

● Operational Reviews: Analyze internal processes, systems, and stakeholder
interactions to detect vulnerabilities.
● Industry Best Practices: Benchmarking against competitors and learning from
industry standards or case studies.
● Past Incident Analysis: Review previous operational failures or near misses to
identify patterns or systemic weaknesses.

20
 ● Stakeholder Involvement: Engage employees, management, and partners to gain
diverse perspectives on potential risks.

Key Point: By systematically analyzing business operations and involving key

stakeholders, firms can uncover operational risks and lay the foundation for effective
mitigation strategies.

HOW TO MITIGATE OPERATIONAL RISK

Mitigation is about proactively managing risks before they become issues. A core part of
this involves ongoing monitoring and the use of data-driven tools.

EFFECTIVE MITIGATION TECHNIQUES:

● Key Risk Indicators (KRIs):
○ Metrics that serve as early warning signs of emerging risks. By tracking
KRIs, firms can act before thresholds are breached.
● Centralized Risk Dashboards:
○ Aggregating KRIs and other risk data into a unified dashboard enables
real-time monitoring of the entire risk landscape.
● Proactive Risk Management:
○ Rather than reacting to crises, firms use insights from KRIs and dashboards
to anticipate and prevent disruptions.

PART 6.4. CHALLENGES OF OPERATIONAL RISK IN FIRMS

Operational risks come in various forms and can severely impact a firm’s financial health,
reputation, and ability to function.
1. Technological Disruptions
● Disruptive technologies can change how industries operate and often
create new markets.
● Early adoption is risky but may be necessary for competitiveness.
● Can destabilize existing processes or systems within an organization.
2. Financial Loss
● Occurs when expenses exceed revenue, leading to a net deficit.
● Causes may include lack of consumer demand, legal expenses, or
third-party disruptions.
● Financial losses can affect liquidity, solvency, and long-term growth.
3. Reputational Damage
● Lack of a comprehensive risk management system can harm public
perception.
● Issues like product defects or environmental violations can erode customer
trust.
● Reputational damage can have lasting effects, including loss of market
share.

4. Cybersecurity Risk
● Includes data breaches, ransomware attacks, and system outages.
● Threatens business continuity and customer trust.

21
 ● Requires robust cybersecurity systems to protect sensitive data and
operations.

International Examples:

1. Therac-25 Medical Radiation Therapy Machine

a. The Therac-25 is a computer-controlled radiation therapy machine
produced by Atomic Energy of Canada Limited (AECL) in 1982 after the
Therac-6 and Therac-20 units (the earlier units had been produced in
partnership with Compagnie générale de radiologie (CGR) of France).
b. The Therac-25 was involved in at least six accidents between 1985 and
1987, in which some patients were given massive overdoses of radiation.
Because of concurrent programming errors (also known as race
conditions), it sometimes gave its patients radiation doses that were
hundreds of times greater than normal, resulting in death or serious
[Link] accidents highlighted the dangers of software control of
safety-critical systems.
2. Target's Canadian Expansion Failure
a. The failure of the market entry was mainly due to the poor expansion plan,
the aggressive timeline and the incomplete supply and pricing strategies,
resulting to unpleasant shopping experience for the Canadian shoppers.
b. When Target expanded into Canada in 2013, it faced massive operational
failures, including supply chain issues, poorly stocked shelves, and pricing
errors, leading to customer dissatisfaction and financial losses. Target
exited Canada in 2015.

22
PART 7: ORGANIZATIONAL IMPLICATIONS OF
OPERATIONAL RISK MANAGEMENT

PART 7.1. DEFINITION OF OPERATIONAL RISK MANAGEMENT

- Operational risk management is the process of identifying and controlling risks

that come from internal processes, people, or systems. It’s an important aspect of
running a business, as it helps organizations identify and manage risks that can
affect their daily operations.

PART 7.2. IMPLICATIONS OF OPERATIONAL RISK IN AN ORGANIZATION

Operational risks cause businesses to change their strategies.

- Operational risks like system failures, fraud or human errors can disrupt a
company’s operations. This forces businesses to adjust their strategies to prevent
further issues and maintain smooth operations.

Operational risks lead to more cautious decision-making.

- When businesses experience operational risks, leaders become more careful in

their decision making. They need to consider potential risks before making any
plans which leads to more thoughtful and risk aware decisions.

Companies strengthen systems and processes to reduce future risks.

- After facing operational risks, companies often upgrade their systems, processes
and employee training to prevent similar issues from arising again. This focus on
improving internal controls helps the organization stay resilient.

Example: Machine Breakdown in a Manufacturing Company

A company that makes bottled water had frequent machine breakdowns, causing delays
in production. Because of this the company decided to buy new machines and schedule
regular maintenance.

They also reviewed their operations to avoid similar risks in the future. This shows how
operational risks changed their business plans and helped them make better decisions.

PART 7.3. THE ROLE OF LEADERSHIP AND CORPORATE GOVERNANCE IN RISK

MANAGEMENT

Leaders create a culture of risk awareness.

- Strong leaders set an example and make sure everyone in the company
understands the importance of managing risks. They help employees follow the
right steps to avoid or reduce risks.

23
Corporate governance makes sure risks are handled properly.

- Good governance means having clear rules and systems for managing risks. It
helps ensure that the company follows the law and acts ethically when dealing
with risks.

Leaders connect risk management with business goals.

- Leaders ensure that risk management is part of the company’s main plans and
decisions. They make sure that risks are considered when making important
business choices.

Governance sets up rules and controls to manage risks.

- Corporate governance provides clear guidelines on how to handle risks. It helps

make sure risks are watched closely and the company is ready to act if any
problems arise.

Example: Data Breach at a Bank

A bank had a data breach where customer info was exposed. The leaders acted fast,
informed the public and fixed the issue with help from IT experts. This showed strong
leadership in managing risk.

After that, the governance team updated their security policies, added regular system
checks and made stricter rules to prevent it from happening again. This showed how
good governance supports better risk control.

PART 7.4. FRAMEWORKS AND BEST PRACTICES FOR MANAGING OPERATIONAL

RISK

Businesses follow different frameworks to manage operational risks. One of the most
commonly used frameworks is the Risk Management Framework (RMF), which involves
identifying, assessing, mitigating, and monitoring risks. Some best practices for
managing operational risk include:

● Conducting regular risk assessments

● Providing employee training on risk awareness
● Establishing internal controls to prevent fraud and errors
● Using technology to monitor and prevent risks

24
PART 8: RISK-REWARD ANALYSIS

PART 8.1. RISK-REWARD ANALYSIS

A risk-reward analysis is a systematic evaluation method that examines the
potential returns of an investment or action against the potential risks involved. This
analytical framework helps decision-makers understand the tradeoffs between potential
gains and losses, enabling informed choices about resource allocation and strategy.

The balance between risk and reward in emerging markets is a key consideration
for investors and businesses looking to expand globally. Emerging markets often offer
high growth potential and attractive investment opportunities, but they also come with
significant risks. Finding the right balance means weighing potential returns against the
uncertainties involved.

PART 8.2. POTENTIAL RISKS AND REWARDS

POTENTIAL REWARDS OF INVESTING IN EMERGING MARKETS

● High Growth Potential – Many emerging economies experience faster

GDP growth than developed countries, offering greater returns.
● Expanding Consumer Base – Growing middle classes and increased
urbanization create new market opportunities.
● Lower Competition – Some markets have less saturation, allowing new
entrants to gain a strong foothold.
● Natural Resources and Labor Advantages – Countries rich in natural
resources or with lower labor costs can provide competitive advantages.

RISKS ASSOCIATED WITH EMERGING MARKETS

● Political and Regulatory Uncertainty – Governments may introduce

sudden policy changes, tax laws, or trade restrictions.
● Currency and Economic Instability – Exchange rate fluctuations and
inflation can erode profits.
● Weak Infrastructure and Governance – Poor legal systems, corruption, and
inadequate infrastructure can make business operations challenging.
● Liquidity and Market Volatility – Financial markets in emerging economies
can be less stable, making investment exit strategies difficult.

PART 8.3. STRATEGIES FOR BALANCING RISK AND REWARD

● Diversification – Investing in multiple countries or industries reduces exposure to

any single market’s risk.
● Hedging and Insurance – Using financial instruments (e.g., hedging against
currency risk, obtaining political risk insurance) helps mitigate uncertainties.

25
 ● Local Partnerships – Collaborating with local firms or stakeholders provides better
market insights and regulatory navigation.
● Agile Business Strategies – Firms must remain adaptable, continuously
monitoring risks and adjusting strategies accordingly. They can do this by having
a:
● Regular Review Process. Quarterly assessments like trigger-based
reviews, performance benchmarking, and stress testing scenarios
● Documentation Requirements. Clear decision criteria like risk tolerance
statements, return expectations, and monitoring protocols
● Communication Framework. Stakeholder updates like progress reporting,
deviation explanations, and adjustment rationale

PART 8.4. RETURN ON INVESTMENT FORMULA

In assessing the viability of entering emerging markets, firms often rely on
financial metrics such as Return on Investment (ROI) to determine whether the potential
reward outweighs the risks. ROI is a simple financial metric used to evaluate how
profitable an investment is and answers the question: "How much return am I getting
compared to what I spent?"

The basic formula is: ROI INTERPRETATION

0% - 10% Low – Risk might not be worth the return

𝑁𝑁𝑒𝑒𝑡𝑡 𝑃𝑃𝑟𝑟𝑜𝑜𝑓𝑓𝑖𝑖𝑡𝑡
𝑅𝑅𝑂𝑂𝐼𝐼 = 𝐼𝐼𝑛𝑛𝑣𝑣𝑒𝑒𝑠𝑠𝑡𝑡𝑚𝑚𝑒𝑒𝑛𝑛𝑡𝑡 𝐶𝐶𝑜𝑜𝑠𝑠𝑡𝑡
× 100 10% - 20% Moderate – Acceptable depending on the market

20% - 30% Good – Usually considered solid, worth considering

30% and above High – Strong return, but may also involve high risk

For instance, a company may consider investing P1 million in an emerging market project
expected to return P1.3 million in profit. The ROI would be:

1,300,000 − 1,000,000
𝑅𝑅𝑂𝑂𝐼𝐼 = 1,000,000
× 100 = 30%

A 30% ROI means that for every ₱1 invested, the company expects to earn ₱0.30
in net profit on top of getting their original investment back. A 30% ROI indicates a high
potential return, suggesting that the investment could be highly profitable. However, in
emerging markets, this figure must be interpreted with caution. High ROI often comes
with greater exposure to political, regulatory, or organizational risks, which could reduce
actual gains. Therefore, firms must balance this return with the realistic risk of disruption
or financial loss.
This illustrates how political and country risk can directly influence the
attractiveness of an investment, and why risk-adjusted ROI becomes a vital part of
decision-making. ROI allows firms to quantify the potential gain from a risky market.
Even a high ROI may not be attractive if political or operational risks threaten the actual
realization of returns. Firms may compare ROI across different countries or projects to
decide where the risk-return trade-off is most favorable.

26
KEY TAKEAWAYS
The report highlights the critical importance of understanding and proactively managing
political, country, and organisational risks, particularly in the dynamic context of
emerging markets. A comprehensive approach involving thorough risk assessment, the
implementation of mitigation strategies, and a continuous balancing of potential rewards
against inherent uncertainties is essential for sustainable growth and success in the
global business environment. The use of tools like Credit Default Swaps for assessing
country risk and the adoption of robust operational risk management frameworks are
highlighted as key components of effective risk management.

MAJOR POINTS:

● Businesses operate in an interconnected world facing political, country, and

organizational risks that can significantly impact decision-making, operations,
and long-term stability. Understanding and managing these risks is crucial for
sustainable growth and maintaining a competitive edge.

● Political risk refers to the potential negative impact on investment returns due to
political instability or changes within a country, stemming from shifts in
government, policies, conflicts, or regulations. Examples include changes in
government policy, political instability, expropriation, geopolitical tensions,
corruption, and legislation.

● Country risk is the uncertainty associated with investing in a particular country

that could lead to losses for investors, influenced by political, economic,
exchange-rate, or technological factors. It is especially critical in less-developed
nations and can affect financial markets and investment returns. Scopes of
country risk include economic, political, social, legal, regulatory, environmental,
and financial risks.

● Organizational risk encompasses internal and external uncertainties within an

enterprise that can lead to financial losses, compliance issues, operational
disruptions, and reputational damage. It can be strategic, operational, or financial.

● Risk assessment is essential in emerging markets due to their growth potential

but also significant risks. Thorough assessment helps anticipate threats, create
strategies, and make informed decisions, improving resilience and protecting
investments.

● Credit Default Swaps (CDSs) are financial derivatives that allow investors to
offset credit risk and can be used to hedge risk, speculate, arbitrage, and diversify
portfolios. The cost of a CDS on government debt (sovereign CDS spread)
reflects the perceived risk of default, with higher spreads indicating greater risk
and lower creditworthiness.

27
● Emerging markets are transitioning from developing to developed status,
characterized by rapid economic growth and industrialization, offering high return
potential but also higher risks.

● Global risk management strategies are evolving, with trends including the
integration of advanced technologies (AI, ML), emphasis on cybersecurity, supply
chain resilience, focus on ESG factors, adoption of GRC platforms, and enhanced
board involvement.

● Transfer risk occurs when a company or investor cannot convert local currency
into foreign currency for international transactions due to government restrictions
aimed at controlling trade deficits. Strategies to mitigate this include political risk
insurance, using hard currency, contractual safeguards, government guarantees,
and reinvesting earnings locally.

● Regulatory risk arises from changes in laws, regulations, or policies that can
increase operational costs, reduce profitability, or alter competition. Firms assess
and adapt to these changes by analyzing updates with legal experts, conducting
SWOT analysis, aligning regulations with business goals, analyzing historical data,
and identifying compliance costs.

● Operational risk focuses on how things are accomplished within an organisation

and is often associated with human error in processes. Types include process risk,
strategic risk, and external events risk. Firms identify and mitigate operational risk
through operational reviews, industry best practices, past incident analysis,
stakeholder involvement, Key Risk Indicators (KRIs), and centralized risk
dashboards.

● Operational risk management involves identifying and controlling risks from

internal processes, people, or systems, leading to strategic changes, more
cautious decision-making, and strengthened systems and processes. Strong
leadership and corporate governance are crucial in creating a risk-aware culture
and ensuring risks are handled properly.

● Risk-reward analysis evaluates potential investment returns against involved risks

to inform decision-making. Emerging markets offer high growth, expanding
consumer bases, lower competition, and resource advantages, but also
political/regulatory uncertainty, economic instability, weak infrastructure, and
market volatility. Strategies for balancing risk and reward include diversification,
hedging, local partnerships, and agile strategies with regular reviews and clear
documentation. The Return on Investment (ROI) formula (Net Profit / Investment
Cost x 100) helps quantify potential gains but must be considered in light of
associated risks

28
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[Link]#Real-Life-Examples-of-Political-Risk-Management

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