Decision making today is more oriented towards data, metrics, predictability models and controls. Risk department forecasts their numbers using heavy duty econometric models. Many of these models are based on absolute precision. Recall the phrase ‘show me the data’ before making any argument. The point is organizations are heavily depending on science today to run the business. We are not challenging science here; it is the way it is being used to make decisions. Why are we consistently getting our numbers wrong? Now there is news about China’s real estate bubble and rise in US foreclosures. Why we make wrong decisions based on certain system and do not learn from them? Why we go back to the same system after failing? Using sophisticated financial models, CEO’s make next quarter guidance only to get them wrong again and later get criticized for not delivering on their promise. 

The last trading day of the year saw the Dow close at 10,428.05, down by 9.3% (despite a major recovery from its March low, which is not necessarily backed by the economic fundamentals) as compared to its closing value of the previous decade i.e 11,497.12. This was the first time ever since the great depression that the Dow actually posted a loss during a decade.

Posted by Kunal Kumar Kundu at 2:32 PM | Permalink | Comments (0) | TrackBacks (0)

We live in an unpredictable world, where change is seemingly constant. Businesses that are unable to anticipate and manage change will inevitably pay a price in losing out on competition, lost revenues, lost time, and lost investments. A proactive firm who would do its homework well would score over reactive firms who choose to take it as it comes. The ability to manage change is critical to success for every business in every location. Country Risk Analysis (CRA) enables businesses to anticipate change and taking measures to control it.

When a firm is already operating in a country then whether its business is under the threat of expropriation by a foreign government in a shifting regulatory environment, or having difficulty converting or transferring currency, or facing attack by the political system, or in a difficult negotiation with a government, CRA can help it manage change by better understanding the environment in which it is operating and providing risk management tools to protect its business. CRA can also help position the operating country amongst its peers or in that particular region to give a bird’s eye view on the ever changing operating risks associated with it.

On the flipside, even when a firm is looking out to expand its reach, CRA can act as initial triggers and signals, by giving the credit worthiness of that particular country or region or a third party view of the risks.

In general for any kind of business, the riskiness to its operation can be broadly bucketed under these following 4 categories:

a)      Economic Risk

b)      Political Risk

c)       Business environment Risk and

d)      Currency Risk

Analysis of the above would require regional or country specific knowledge as well as expertise, along with access to detailed data. Determining the right variables under each category is also important as also fixing the appropriate weight. Principal component analysis (PCA) helps to convert a number of possibly correlated independent variables into a smaller number of uncorrelated variables.

Within the economic risks, the idea is to look at various key economic indicators like real GDP growth, inflation, fiscal balance (as well as public debt), external balance, unemployment etc and aggregate them suitably to arrive at comparative scores. Again for each indicator, a weighted average of the recent years is taken to avoid recency bias.

Analysis on the political risk should answer the following questions – Is there a functional democracy and an independent judiciary? How strong is the ruling party/coalition or may be how strong the opposition is? How frequent are elections in the country and how fast does key economic policies change with the change in rule? How independent are the government policies from foreign intervention? What is the state of law and order and where does the country rank in the corruption index? Foreign relations or stand in regional geopolitics? These questions often don’t yield any objective scores, which is why the regional/country specific domain of the analyst comes into play.

The business environment risk would typically cover the earlier analyzed economic and political score rating along with indicators like a) openness and competitiveness – these can be arrived at by looking at the country’s foreign investment policy, foreign trade policy, tax regime, labor policy, legal framework (viz. industrial laws etc), property rights; b) language and communications – acceptability as well as use of foreign languages is a key area of concern for firms when they wish to set up their operations there; c) physical and IT infrastructure – gauged by the extent and condition of road, air and port connectivity, telephone lines, internet penetration etc.; d) soundness of financial markets – health of the banking sector as well as the various asset classes; e) a detailed market research on the firm’s industry is equally important – information on large players already existing along with their market shares, information on the sectoral performance as well as government policies aiding or impeding the sectoral growth.

The currency risk, which can be part of the economic risk as well as the business environment risk, needs a separate classification just owing to its immense importance as this probably has the most immediate as well as severe impact on any operations. These can be gauged by looking at the type of foreign exchange regime that operates in the country as well as the independence of the monetary authority. Inflation rates, interest rate differential with other countries, level of foreign exchange reserves, level of portfolio flows and most importantly the volatility of the currency over its mean value are other significant contributors to this category.

Typically a firm would like to evaluate their strategies based on an average score of all the above, but given its nature of exposure or operations, it may want to choose or reweight the above for a more representative score.

Provision of such analysis is not new as we would have a lot of research organizations providing it, but what acts as the differentiating factor is the depth of regional and country specific domain, prior experience of doing it as well as access to the key data.

CRA thus on one hand helps reduce risk with access to all critical information impacting the market – market trends, competitor threat and economic factors, and on the other hand would help identify new growth areas by achieving a well rounded view of the market. Timely and accurate CRA is vital for undertaking more sound business decisions for boosting a stable and non-inflationary growth of a company and for coping with various risks under a dynamic and rapid integration of our economies.

Posted by Rajarshi Majumdar at 9:13 AM | Permalink | Comments (3) | TrackBacks (0)

The IIP recorded a growth of 11.7% in November, as compared to 2.5% growth for the same period last year. This comes on the backdrop of 10.4% growth in October and the IIP growth has crossed double digit figure in three out of the last four months. The overall growth for the eight month period (till November) is 7.6%, nearly double the 4.1% growth for the same period in the previous year. While a good part of manufacturing growth can be attributable to stock building, what is important to note is impressive growth recorded by the capital goods sector. It grew by 12.2% in Nov’09 as against a mere 0.5% growth in Nov’08. Overall, the sector grew by 7% during the eight month period.

Indications are that the growth will continue to be robust next few months, given the low base effect. On the basis of this, I am upping my GDP growth forecast for the full year from 5.9% to 6.5%.

The downside to this is the likely increase in interest rates, sooner rather than later. Improved growth scenario and comparatively high inflation rate (even if it moderates, I am inclined to believe that the inflation rate will be sticky downward) will be a potent combination for a tighter monetary policy. In this context, it is also important to note that the economy is still critically dependent on the stimulus and the withdrawal, as and when it happens, will add a lot of stress to the economy, especially in the scenario where the deficit is going to remain high. Added to this is that fact that the mess that the global economy has been in, is yet to be cleared off. While there seems to be some semblance of recovery, the pain is far from being over. Europe is in big trouble apart from a few pockets. Japan hardly matters. The US is not yet out of the woods, as the latest unemployment numbers reveal.

Rising interest rates, high deficit, potential withdrawal of stimulus along with preponement of demand to the current financial year due to the stimulus, global growth risks – all conspire to a not too rosy a scenario going forward. India is definitely in a better shape as compared to others, but reverting back to the 9% growth rate is not going to happen soon. I am expecting a 7% GDP growth during FY11.

Posted by Kunal Kumar Kundu at 1:43 PM | Permalink | Comments (0) | TrackBacks (0)

Organizations who are in the businesses where their employees need to have long touch time with the customers and need to understand their customers businesses would do well to plan in advance for their future attritions as customers lose confidence in the organizations and may not like to give more business/repeat business if they see a lot of flux in the team they work with.

To tackle the employee attrition menace organizations need to use attrition modeling to predict the attrition probabilities of their employees and take corrective actions to retain employees whom they want to retain and let go of those employees who are not good performers. Attrition model not only helps organizations to take preemptive actions to retain high performers it also helps them to pre-plan the recruitment requirements and build the new employee pipeline.

When presented with an employee attrition model, more often than not managers look at the individual variables in the attrition model and say the model is not an actionable one and do not take any action. But more than the individual variables in the model, managers need to look at the respective employee groups with attrition probability ranks (Rank 1 being the highest probability to attrite and rank 10 being the lowest probability to attrite) and identify the respective employees whom they want to retain for their contribution/potential contribution to the organization's business and take corrective actions.

Posted by Suvendu Tripathy at 4:09 AM | Permalink | Comments (0) | TrackBacks (0)

The December 2009 unemployment rate for the US was stood at 10%. What, however, was shocking was the 85,000 jobs were lost, while the general expectation was there would be no job loss. The euphoric expectation was on the back of a mere 11,000 job loss reported in November’09. While the November number was revised upward to plus 4,000 (implying a creation of 15,000 jobs, which though is more of a statistical effect, since the October job loss was revised upward by 16,000) the December numbers poured water on whatever positive expectation that was there on the ground.

Clearly, whatever the spin doctors are saying, the US is far from being out of the woods. The mean duration of unemployment continued to rise and has crossed 29 weeks (29.1 weeks to be precise).

But there’s even worse news. As reported by the New York Times during end November’09, the BLS has admitted that its Birth/Death Model has overestimated jobs by about 800,000. The Labor Department said that it planned to revise the job figures by subtracting more than 800,000 jobs that it had wrongly estimated were filled by workers.

A lot of blame for this goes to the so called birth/death model. This means that it has been assumed that jobs have been created by newly born companies that couldn't be surveyed, and weren't contacted, by its workers. The acceptance by the labour department clearly means that they failed to estimate how many small businesses failed.

That model appears to have misjudged how many companies went out of business during the recession, meaning the labor market was even weaker than initially thought. This is also intuitively valid, given that the current recession has hit small businesses especially hard, driving down demand and choking off vital sources of credit at the same time. The problem is, this is not only underestimating the grim unemployment situation, it is very likely that even the GDP is being over estimated by the inflated employment numbers.

According to the November 25th Press Release of the American Bankruptcy Institute,  45,510 business bankruptcies were recorded during the first three quarters of 2009 (Jan. 1 – Sept. 30) which is more than the full year 2008 (Jan. 1- Dec. 31) business filing total of 43,546. And this number is already the highest ever recorded since 1998. Business filings for the 3-month period ending Sept. 30, 2009, totaled 15,177, up 32 percent from the 11,504 bankruptcy business cases filed in the same period in 2008.

Problem is, it is very difficult for the Labor Department to incorporate all these data in its monthly employment reports, which are normally released on the first Friday of the next month. Hence, their report depends a lot on estimates. As per BLS survey methodology, the department surveys about 160,000 firms to get a sense of how many jobs were added or cut and it also uses the "birth-death" model to try to estimate out how many companies opened or closed. Once a year, the department looks at unemployment insurance tax records to get a more accurate picture of how many people were employed, and matches that up with its own data. And, each February, it tries to reconcile these differences by releasing a "benchmark revision".

The so-called “benchmark revision” that was announced in late November 2009 will not formally be incorporated into the job figures until February, and could be revised. But the figures indicate that last March the government overestimated the total number of jobs by 824,000. Reducing that number from the employment figure and adding the same to unemployment shows that the actual unemployment rate for March 2009 should have been 9.2% rather than 8.6%, implying an understatement of the unemployment rate by as much as 60 basis points.

So, once the revision is done in February, the actual unemployment rate will look very anemic indeed. Assuming the miscalculation of 824 remains the same, the current unemployment rate would be actually 10.5% and not 10% as reported. And it is quite likely that the same mistake is still taking place. This means that the real unemployment number would actually be even worse.

Posted by Kunal Kumar Kundu at 3:31 PM | Permalink | Comments (0) | TrackBacks (0)

In my last post, I had argued that central banks are generally much more independent from administration hence making monetary policies more effective.

Yesterday, Argentine President Cristina Kirchner, along with her entire cabinet, signed a “decree of necessity and urgency” to oust the Central Bank Chairman Martin Redrado from his post. The reason? In short he wanted more autonomy for the central bank. In December 2008, the government had announced that it would transfer USD6.6 billion of central bank’s international reserves (from about little more than USD40bn it currently holds) to a new “The Bicentennial Fund”, that would be created to service public sector debt. And Mr. Redrado refused to agree to this.

While the new fund was expected to be earmarked for primarily servicing government debt, some argued that the real objective would be to free up resources for the government’s populist programs and prepare for next year’s elections. The dire need for this debt servicing was a little surprising given that the total debt burden for the government is just about 40% of GDP and the fiscal deficit was even less than 2% of GDP (even projections).

As for the modalities in this arrangement, in exchange for the central bank reserves, the Ministry would issue a dollar denominated 10-year note with an interest rate no higher than the LIBOR minus 100 bps. And with the current LIBOR the initial rate would thus be zero. There would be no net change in the central bank’s balance sheet but probably one if the central bank wishes to invest its reserves otherwise.

The Chairman opposed this and refused the transfer of the funds, and the use of forex reserves are always the central bank’s prerogative. Use of central bank’s reserves for debt servicing or for infrastructure purpose is not new but in this case the urgent need for this was probably not justified. Redrado, now faces the axe for not obeying official orders being a public servant. This decision however, needs an approval from a panel chaired by the Vice President including 2 members each from the lower house and the senate. But if this goes through, it would be detrimental to the functioning of the central bank, as it would lose its independence.

Posted by Rajarshi Majumdar at 8:01 AM | Permalink | Comments (0) | TrackBacks (0)