1
Managing Emerging Markets Risk
Information
Challenge
Presented at
Managing Emerging Markets Risk Conference
Organized by Exporta - OMNI WHITTINGTON
London, United Kingdom
November 21, 2002
IEI Intrepid Explorers, Inc. - Joachim C. Bartels - All Rights Reserved
2
Information
Challenge
Key Discussion Points
• The Age Old Issue ….. • Two Sets of Books
• Complexity of Risk is • New Demands on Information
Growing
• The Imperfect World of • Attitudes and Infrastructure
Information Impact Availability
• The Wakeup Call • Financial Disasters and Losses
of Unprecedented Proportions
• Overcoming the • Missionaries – Emissaries –
Information Deficit and a Long Way to Go ….
IEI Intrepid Explorers, Inc. - Joachim C. Bartels - All Rights Reserved
3
Balancing Opportunity and Risk
Risk
Opportunity
Information
IEI Intrepid Explorers, Inc. - Joachim C. Bartels - All Rights Reserved
4
The Arabian See in the 17th Century
The Most Precious Good?
• Information ….
Rather than Spices
Land Route: • Demand & Supply
‘The Runner’ • Pricing
• Credit
But
• Two Sets of Books …
Sometimes No Books ….
Sea Route:
Return Voyage
24 Month
IEI Intrepid Explorers, Inc. - Joachim C. Bartels - All Rights Reserved
5
The New World of Risk
Legal
Government Infrastructure
Information
Infrastructure
Credit
Infrastructure
Business Human
Infrastructure Resources
IEI Intrepid Explorers, Inc. - Joachim C. Bartels - All Rights Reserved
6
The New World of Risk
Information Risk
Legal
Government Infrastructure
Information
Infrastructure
Credit
Infrastructure
Management Risk
Financial Risk
Business Human
Infrastructure Resources
Business Risk
IEI Intrepid Explorers, Inc. - Joachim C. Bartels - All Rights Reserved
7
The New World of Risk
Transition
Information Risk
Risk
Legal
Government Infrastructure
Millennium Bomb
Domino Information
EURO
Effect Infrastructure
Conversion
Credit E-Commerce
Infrastructure BASEL II
Management Risk
Financial Risk
The Questionable Human
Business
dot.com Infrastructure Accounting Resources
Bust
Business Risk
IEI Intrepid Explorers, Inc. - Joachim C. Bartels - All Rights Reserved
8
Two Sets Of Books
• Off-Balance Sheet
Transactions
• Lack of Help
Risk • Transparency
• Disclosure
• Conflict of Interest
• Management
• Directors
• Auditors
• Fraud
IEI Intrepid Explorers, Inc. - Joachim C. Bartels - All Rights Reserved
9
Information
Challenge
Key Discussion Points
• The Age Old Issue ….. • Two Sets of Books
• Complexity of Risk is • New Demands on Information
Growing
IEI Intrepid Explorers, Inc. - Joachim C. Bartels - All Rights Reserved
10
New Demands On Information
• ‘Two Sets of Books
Syndrome’
• Ability to Cross Check / Benchmarks
• Industry Benchmarks
• Transparency in Credit Transactions
• Information Pooling
• Financial Statement Databases
• Negative – Positive Trade Information
IEI Intrepid Explorers, Inc. - Joachim C. Bartels - All Rights Reserved
11
New Demands On Information
• Quality of Information
• Reliability of Financial Statements and Audit
• Emphasis on Increased Transparency
• Quality of Financial Reporting / Audit
• Frequent Changes in Accounting Rules
• Changes in Auditors
• Tougher Disclosure Requirements
• Mandatory and Voluntary Disclosure
• Better Documentation / Instrument of Controlling
IEI Intrepid Explorers, Inc. - Joachim C. Bartels - All Rights Reserved
12
Basel II Minimum Rating Criteria
Country Risk
Characteristics
Industry Position – Qualitative
Future Prospects Criteria
Competence of
Management
Quality and Timeliness of
Operating Leverage Information and Audited Internal Rating
Financial Statements
Capital Structure
Quality of Quantitative
Earnings Criteria
Sustainable
Cash Flow
IEI Intrepid Explorers, Inc. - Joachim C. Bartels - All Rights Reserved
13
Information
Challenge
Key Discussion Points
• The Age Old Issue ….. • Two Sets of Books
• Complexity of Risk is • New Demands on Information
Growing
• The Imperfect World of • Attitudes and Infrastructure
Information Impact Availability
Infrastructure
Country
Information
Infrastructure
IEI Intrepid Explorers, Inc. - Joachim C. Bartels - All Rights Reserved
14
Country Infrastructure
Legal
Government
Infrastructure Information
• Transparency • Legal Framework Infrastructure
• Bribery and • Justice Admin. Fairly
Corruption • Rights / Responsibilities of • Communication Availability
• Parallel Economy Shareholders • New IT Meeting Business Needs
• Data Security Enforced
Credit
Infrastructure Business Human
Infrastructure Resources
• Central Bank Policy • Transfer of Know-how • Economic Literacy
• Export Credit & Insurance • Venture Capital • Education in Finance
• Confidentiality of Financial Transactions • Insider Trading • Worker Motivation
• Legal Regulation of Financial Institutions • Cash Flow - Self Financing • Finance Skills
• Flow of Credit from Banks to Businesses • Ethical Practices • Adaptability
• Financial Institution Transparency • Credibility of Managers
• Availability of Factoring • Credibility of Corporate
IEI Boards
Intrepid Explorers, Inc. - Joachim C. Bartels - All Rights Reserved
15
Information Infrastructure
Information Risk
Legal • Reliability / Accuracy of Data
Government Infrastructure
• Disclosure - SEC
• Disclosure - Filing of Financials Information
• UCC Filings or Equivalent Infrastructure
• State of Public Registers
Credit • Access to Public Registers
Infrastructure
• Compliance
• Availability of Court Records
Management Risk
• Credit Bureaus
• Access to Court Records
Financial Risk
Business Human
Infrastructure Resources
Business Risk • Voluntary Disclosure
IEI Intrepid Explorers, Inc. - Joachim C. Bartels - All Rights Reserved
16
Low High
10 High
High
9
Finland
8 USA
Chile Singapore
7 Germany
Infrastructure
6
South Africa
Country
Malaysia
5 Philippines Brazil
Thailand
India Mexico Venezuela
China
4 Russia Colombia
Argentina
3
Indonesia
2 Subject to Revision
1
Low Low
0
1 2 3 4 5 6 7 8 9 10
Low Information High
IEI Source: IMD & IEI Surveys Intrepid Explorers, Inc. - Joachim C. Bartels - All Rights Reserved
17
Low High
1 Low Risk
Low Risk
USA
2 Finland
Singapore
3
D&B Country
Risk Rating
4
Kenya
Subject to Revision
Vietnam
Tanzania Peru
5 Bulgaria
Romania
Kazakhstan Sri Lanka
Algeria Bangladesh
6 Nepal
Azerb
Nigeria
High Risk Georgia High Risk
Albania
7 Congo DR Zimbabwe
0 1 2 3 4 5 6 7 8 9 10
Low Information High
IEI Source: IMD & IEI Surveys Intrepid Explorers, Inc. - Joachim C. Bartels - All Rights Reserved
18
Information
Challenge
Key Discussion Points
• The Age Old Issue ….. • Two Sets of Books
• Complexity of Risk is • New Demands on Information
Growing
• The Imperfect World of • Attitudes and Infrastructure
Information Impact Availability
• The Wakeup Call • Financial Disasters and Losses
of Unprecedented Proportions
IEI Intrepid Explorers, Inc. - Joachim C. Bartels - All Rights Reserved
19
Information
Challenge
The Wakeup Call
• Losses of Unprecedented • Rating Agencies Reports Defaults
Proportions have Reached Levels not Seen
Since the Great Depression
• Central Banks Report an Explosion
of Non-performing Loans
IEI Intrepid Explorers, Inc. - Joachim C. Bartels - All Rights Reserved
20
Information
Challenge
Key Discussion Points
• The Age Old Issue ….. • Two Sets of Books
• Complexity of Risk is • New Demands on Information
Growing
• The Imperfect World of • Attitudes and Infrastructure
Information Impact Availability
• The Wakeup Call • Financial Disasters and Losses
of Unprecedented Proportions
• Overcoming the • Missionaries – Emissaries –
Information Deficit and a Long Way to Go ….
IEI Intrepid Explorers, Inc. - Joachim C. Bartels - All Rights Reserved
21
Information Overcoming the Information Deficit
Challenge
• Missionaries • Information Company Executives
Promoting the Benefits of
Information Pooling
• Emissaries • Concentrated Effort by World Bank
& IFC to Create Credit Bureaus
• A Long Way to Go • Concept of Information Pooling for
Consumer Data now Accepted
• Credit Bureaus Coming on Stream: But,
Creating Knowledge from Raw Data
Takes Time: 3 to 5 Years
• Pooling of SME Data is Next in Line
• Continued Lack of Reliable Performance
Data on Businesses
IEI Intrepid Explorers, Inc. - Joachim C. Bartels - All Rights Reserved
22
A Long Way to Go …..
Capital Market Bank & Trade Credit Consumer Credit
Public Large Medium SMEs Private Individuals
Corporations Privately Size
Professionals /
Owned
SOHO
Corporations
Global Rating Local Credit Information Consumer Credit
Agencies Rating Suppliers Bureaus
Agencies
Emerging Market Status
Extensive Emerging Predominantly Latin America well
Coverage Segment Correspondent Established
- India Networks
- Korea Asia and Eastern
- China Emerging Data Based Europe Emerging
Services
IEI Intrepid Explorers, Inc. - Joachim C. Bartels - All Rights Reserved
23
Closing the Gap
Capital Market Bank & Trade Credit Consumer Credit
Public Large Medium SMEs Private Individuals
Corporations Privately Size
Professionals /
Owned
SOHO
Corporations
Global Rating Local Credit Information Consumer Credit
Agencies Rating Bureaus
Public Records
Agencies Investigation of Company Public Records
Background Positive & Negative Payment
Manual Analysis Trade Information Information
Credit Scoring Credit Scoring
Knowledge Bases
Expert Systems
Software Tools The Great
Information
Void
IEI Intrepid Explorers, Inc. - Joachim C. Bartels - All Rights Reserved
24
Information
Challenge
Summary
• Losses of Unprecedented Proportions Forcing
the Issue of Availability of Accurate, Reliable
and Timely Information
• Concerted Efforts by Financial Services
Community, World Bank and IFC in Asia,
Middle East and Eastern Europe
• Emphasis is on Consumer and SME Data
• Decisive Lack of Performance Data on
Businesses - Remedy a Long Way Off
IEI Intrepid Explorers, Inc. - Joachim C. Bartels - All Rights Reserved
25
Managing Emerging Markets’ Risk
Thank
You
Presented at
Managing Emerging Markets Risk Conference
Organized by Exporta - OMNI WHITTINGTON
London, United Kingdom
November 21, 2002
IEI Intrepid Explorers, Inc. - Joachim C. Bartels - All Rights Reserved