How Investors Can Navigate Pandemic-Related Risk in Emerging Markets

How Investors Can Navigate Pandemic-Related Risk in Emerging Markets

by Grant T. Harris - May 15, 2020

Long after developed markets have Covid-19 relatively under control, the virus will remain a threat in emerging markets, where uneven governance, weak health systems, dense urban slums, and high rates of poverty multiply the challenges of fighting the pandemic. In a few countries there are already early signs of political instability and civil unrest; in others the political effects will become clearer as the virus and government responses unfold over the months ahead.

This long tail poses a unique disadvantage to foreign investors in emerging markets. Business environments in these locations were already complex, but the pandemic makes the politics even more complicated and the relationships and information needed to navigate them even harder to access. Foreign investors will, at a minimum, face two widespread yet underappreciated risks.

First, travel restrictions and limitations may limit investors’ access to first-hand information. Even as developed countries flatten the curve, travel to developing countries will likely remain restricted and difficult. Governments or companies won’t allow it, there could be local health restrictions or heightened visa requirements, and some regional airlines will have gone bankrupt.

Foreign investors without a strong local presence will face the unenviable choice of flying blind or increasing reliance on local partners, each carrying its own risks. Local partners can be a wild card when investing in emerging markets, even before the pandemic: strong ones can make all the difference, but so too can an unreliable ones. Today, overreliance on a local partner combined with less opportunities for direct oversight can result in missed opportunities, tarnished brands, and greater liability (for example, if a local partner does not comply with anti-bribery laws).

Forced physical distance can also exacerbate business and cultural misunderstandings. In one recent instance, an American company wrote a letter to a minister of finance in an African government describing how coronavirus tripped a change in law provision in a Power Purchase Agreement. This led to a misunderstanding that the company was litigious and demanding money. While the company’s CEO would normally hop on a plane to clear up such a misconception face-to-face, this is not possible during a pandemic. When communication is more difficult, cultural sensitivities are harder to navigate.

Second, emerging market governments may be less able to function efficiently, hampering investors and projects. In addition to overwhelmed health systems, these governments are confronting capital flight, tens of millions of lost jobs, cratered economies, and unsustainable debt levels. In environments where private investments require consistent government champions, it may be unclear which projects will actually resume and move forward (or at what pace).

Many of these governments will also be run even less effectively as more vulnerable officials self-isolate and worry about their personal health. The bulk of heads of state in Latin America and the Caribbean, the Middle East, and Africa, for instance, are over 60, which puts them at significantly higher risk of serious illness or death from Covid-19 - and for many, this is the first time they are without the option of traveling abroad for top-notch medical care. Nor do ministers tend to be spring chickens, so the suite of infrastructure contracts for approval (and the hundreds of pages to be initialed) may languish on their desks. In some cases, the death or incapacity of key figures will spark dramatic policy uncertainty. In Nigeria, for instance, the president’s chief of staff died from coronavirus. He was “the central figure” in setting policy on infrastructure investment, power, and agriculture, according to a Nigeria-focused consulting firm.

I’ve seen these types of challenges over 20 years in the private and public sectors. Having twice served in the White House (including as senior director for Africa during the Ebola epidemic), I’ve witnessed how crisis and its aftermath can overwhelm governments in developing countries. I’ve also seen investments stall and money wasted as companies struggle with limited information or chase after shifting government priorities. Years of advising companies navigating uncertain business environments since then informs the following advice:

Revisit how to acquire and act on market intelligence. This means seeking out competitors, local representatives of international financial institutions, journalists, commercial officers at your embassy, business associations, and other sources to compare notes on what’s happening on the ground. It may help to re-examine in-country teams and whether changes to the mix of local and expatriate staff could help. As is always the case, though often underappreciated, consider how to interpret and respond to these data points. Having information is necessary but not sufficient; you need to have the policy and political expertise in-house or on contract to wield it effectively.

Take a fresh look at your local partners. How capable - or not - a local partner is will materially influence an investor’s risk and options. What are the partner’s strengths and weaknesses? And what are the ways to maximize the former and scaffold around the latter? If physical distance forces greater reliance on local partners than would otherwise be ideal, now could be the time to beef up or refresh training and compliance safeguards. Solid local legal counsel can also help (and, if they’re good, be another source of market intelligence).

Identify the government’s current priorities and pivot accordingly. Political antennae are required to figure out which deals will move forward and which will stall in this new environment. This may mean more time and attention from C-suites to reach out to (and stay in touch with) senior government officials or hiring more local staff and consultants who have connections with governments and can advocate for priority investments, among other steps.

Keep in mind the human dimensions of the crisis. Like everyone, the officials you interact with and your local staff and partners will be worried about their health, their loved ones, and the economic crisis in their communities and countries. Government officials, regardless of age, will be physically and emotionally exhausted and under tremendous stress. Going back to basics can help: send a text or WhatsApp to colleagues in the market asking about their health and families and be extra sensitive to how things may be interpreted. Investors should also emphasize their commitment to the country and optimism for its recovery and future economic growth - and stress how an investment will support local jobs and communities (environmental, social, and governance programs can also help strengthen the narrative).

The political risk deck has been reshuffled the world over. Companies investing in emerging markets in particular need to take a fresh look at the hand they’ve been dealt. How coronavirus and its immediate aftermath affect a country or company’s outlook will differ, and new risks in some countries will be far more extreme than dated local knowledge or overwhelmed governments. Yet redoubling efforts now to stay as current and plugged-in as possible will help foreign investors spot risks and opportunity in these uncertain times.

Grant T. Harris served as the principal advisor to President Barack Obama on issues related to Africa, serving as Special Assistant to the President and Senior Director for African Affairs at the White House from August 2011 to August 2015. He is the CEO of Harris Africa Partners LLC and advises companies and organizations on strategy, policy, and mitigating risk with respect to doing business in Africa.