BRIC Economies Lack Adequate Risk Management

The emerging markets have long been an attractive destination for corporate expansion. Unlike the saturated West, they represent a frontier of possibilities for business, and as their middle classes develop, so too will their demand for goods and services. Untapped natural resources, cheap labor and the lack of complex regulation present other draws that often outweigh any potential downside.

With economic growth still lagging in the United States and Europe -- something few project to change in the near future -- many economists have naturally expected the trend of global corporate expansion to accelerate. But a new report that reveals the depth to which the booming BRIC economies (Brazil, Russia, India and China) are vulnerable to external shocks due to a lack of risk management may have some companies rethinking their plans.

Along with growing GDPs, these countries will be subject to volatile economic cycle swings. And according to more than 60 policymakers in finance ministries in the Group of 20 nations surveyed by Booz & Company, they will not be able to implement corrective measures quickly or effectively enough.

"[The BRIC economies] have rebounded fastest from the crisis and have returned to warp-speed economic growth," states the report. "Yet they lack adequate risk management frameworks and institutional setups, leaving them susceptible to external shocks."

The solution, according to Booz & Company, is reform. In the post-crisis world, the finance ministries in Brazil, Russia, India and China now rely too heavily on the ad-hoc policies adopted to stem the downturn, namely ineffective governmental intervention, near-term fiscal targets and bench-marking against their regional peers.

How can the officials in these countries change course? "The finance ministries of these countries have three reform priorities," states the report. "First, they should delineate and mitigate contingent liabilities. Second, they should make their economic systems more transparent. Finally, they must synchronize fiscal and monetary policymaking." Whether or not reform occurs is a question that only time will tell. One thing that is certain, however, is that other major shocks are on the way.

"Russia is vulnerable to swings in the price of oil, Brazil to commodity prices and India and China to global demand," states the report. "China faces additional risk of potential changes in currency policy, which could have ramifications for its trade position."

The opportunities offered by the BRIC markets are too great to ignore for many companies. But taking into account these challenges and the threats presented by infrastructure in India, pollution in China, corruption in Russia and security in Brazil, risk managers will need to weigh a whole host of issues before fully embracing these destinations.