The political turmoil in Egypt is a reminder that the cost of capital in emerging markets has to be regularly reassessed.
Vincent Ryan, CFO.com | US
February 2, 2011
Thanks for pointing this out, Stephen. My error, not Roger's. I would also direct readers to this excellent article by Steven Abernathy on "The Seat Belt Problem: A New Approach to Calculating Risk-Adjusted Returns." Abernathy gives a lucid perspective on one key problem with "the risk metrics in use today. They focus on what happened rather than what could have happened." Here's the link: http://tinyurl.com/6djpxjm
Posted by VINCENT RYAN | February 03, 2011 10:06 am
Congrats to Vincent Ryan for a timely and MOSTLY correct read of the situation. One item though, screams out for correction - the quotes by Roger Grabowski, a managing director at Duff & Phelps: "...says Grabowski... While companies buy political risk insurance to protect assets and contracts,... the term of coverage might not be long enough... "The real issue in emerging markets is that you're committing money for long-term investments, but the risk mitigation ý like currency hedging ý is available only for the short term. " This is simply incorrect. Political Risk Insurance (PRI) is available in the commercial market for 3, 5, 7, 10 and even 15 year committed, non-cancelable contract periods. The government agencies who compete in the same PRI space can and do write for up to 20 years. These uninformed and erroneous comments cause harm by disinforming your readership of real options available to deal with what's otherwise so accurately reported in the piece - that the risks of operations in emerging and frontier markets has been chronically underestimated by management these past years, as western corporates scrambled to expand outside slower-growing home economies. Obviously those higher Emerging Market returns come with a great deal more risk than was previously understood. Stephen KAY
Posted by Stephen Kay | February 03, 2011 07:41 am© CFO Publishing Corporation 2009. All rights reserved.