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2008: Highest levels of political and economic uncertainty for a decade Geneva, Switzerland, 9 January 2008 - The World Economic Forum released today Global Risks 2008, which highlights the need for new thinking and concerted action on a number of problems. The report expresses fears that the current liquidity crunch will spark a US recession in the next 12 months and calls for new thinking on systemic financial risk in response to the revolution in financial markets over the last two decades. It also recommends a set of principles for country risk management and examines how the financial sector might take on an increasingly important role in risk transfer in the future. The report also warns that food security will become an increasingly complex political and economic problem over the next few years, with issues of equity and trade-offs between security and other issues making the design of global policy both difficult and necessary. Greater cooperation on managing vulnerabilities associated with cross-border supply chains and concentrations of production may also be needed. Finally, with the dollar price of oil at record highs, the report recommends an improved approach to securing viable energy supplies in the years ahead. Global Risks 2008, published in cooperation with Citigroup, Marsh & McLennan Companies, Swiss Re, the Wharton School Risk Center and Zurich Financial Services, highlights key areas of risk that will be a focus of discussions by business leaders and public policy-makers at the World Economic Forum Annual Meeting in Davos later this month. The report is based on input from a network of more than 100 top business leaders, decision-makers, scientists and other leading academics convened throughout 2007 as part of the World Economic Forum’s Global Risk Network. The topics identified in the report will be at the core of the agenda for the Annual Meeting. Emerging issues in global risk Global Risks 2008 focuses on four emerging issues which will impact the world economy and society in the decade ahead. While many of the risks cannot be avoided, they can be better understood, managed and mitigated. • Systemic financial risk Changes in financial markets over the past two decades have led to the ownership of risks being decentralized, along with greater opportunities for risks to transmit between individual firms and markets – making effective risk management all the more critical. Under normal market conditions, the financial system has improved its capacity to assume and distribute risk, and has become more stable. But, to mitigate the impact of the types of challenges seen in 2007, the report calls for increased public and private sector collaboration on stress testing, liquidity management, risk assessment and prevention to address what it describes as the “fragmentation of ownership of global risks.” • Supply chain vulnerability All companies and governments who depend on external suppliers face disruptions to their supply chain; building a new culture in this area, along with an international approach to supply chain risk management across private and public sectors, is among the first steps to broader risk mitigation. • Energy “Global Risks 2008 points to a future of tremendous challenges, but also opportunities for business and government decision-makers to demonstrate their leadership,” said Professor Klaus Schwab, Founder and Executive Chairman of the World Economic Forum. “The interconnectedness of global risks discussed in this report reflects the need for a collaborative framework for response. The upcoming World Economic Forum Annual Meeting will provide a framework for those discussions.” David Nadler, Vice-Chairman, Marsh & McLennan Companies (MMC), USA, said: “As the report says, systemic financial risk is the most immediate and, from the point of view of economic cost, most severe risk facing the global economy. With so many potential consequences of the 2007 liquidity crunch unresolved, the outlook at the beginning of 2008 is more uncertain than it was a year ago. The US Federal Reserve has projected direct losses related to sub-prime of US$ 150 billion; non-sub-prime financial losses may be considerably greater. Addressing the systemic financial risk identified in this report will be a key topic for business and political leaders in Davos this year. “Energy supply is also a crucial issue. The global economy has demonstrated remarkable resilience to increases in energy prices since 2004. But the limits of resilience may be close to being reached. Over the next two decades the supply of primary fossil fuel will become tighter with the world economy becoming much more vulnerable to price shocks as a result. The report urges better dialogue at all levels between emerging and developed countries and between the corporate sector and government and regulators. A move towards a forward-looking regulatory framework is needed in order to ensure long-term economic viability. This framework should seek to unlock investment and innovation in cleaner energy and, ultimately, deliver an economic price for carbon.” Risk mitigation: increasing the role of financial markets and better country coordination are key Christian Mumenthaler, Member of the Executive Board of Swiss Re, who served for three years as the group’s Chief Risk Officer, said: “The development of the ILS market has increased the ability of insurers and reinsurers to accept peak risks such as US hurricanes. This has become increasingly important because climate change has elevated the frequency and severity of tropical cyclones. The extra insurance capacity available through these instruments helps private companies and governments mitigate and manage these peak risks.” Besides ILS, a wide variety of other financial instruments are now being developed to transfer insurance risks, including weather derivatives. Mumenthaler added: “The weather derivatives market has grown at an explosive rate in recent years. For example, these instruments can provide rapid payments to governments and farmers who can use them to hedge against too little rainfall and excessive heat in the growing season, along with too much rain in the harvesting season. In this way, both the state and commercial growers can invest in crop production with a greater degree of confidence, helping to optimize food production and security.” In Global Risks 2007, the Global Risk Network of the World Economic Forum warned of a growing under-appreciation of risk in financial markets, provided a snapshot assessment of a range of global risks for the decade ahead, and recommended the institution of country risk officers and flexible issue-based international coalitions to manage the complexity of the global risk environment. Country Risk Officer: Establishing principles for country risk management In Global Risks 2007, the establishment of country risk officers was recommended to help improve risk management at the national level. In Global Risks 2008, the report looks at the specific example of the United Kingdom’s Civil Contingencies Secretariat and establishes a set of principles for country risk management which may apply across different institutional arrangements. An international forum of country risk officers could potentially offer a much improved capacity to exchange information about inherent cross-border global risks, and also improve the global ability to anticipate and respond to risk. Notes to editors Marsh & McLennan Companies (MMC) For MMC please contact: Jason Groves Swiss Re For Swiss Re please contact: Zurich Financial Services Zurich Financial Services Group (Zurich) is an insurance-based financial services provider with a global network of subsidiaries and offices in North America and Europe as well as in Asia Pacific, Latin America and other markets. Founded in 1872, the Group is headquartered in Zurich, Switzerland. It employs approximately 58,000 people serving customers in more than 170 countries. World Economic Forum |
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