Finance

Financial risks in 2019: how not to lose everything

Last year, in a study of key financial risks, in which 2,415 experts from 86 countries participated, Allianz Risk Barometer placed “possible failures in large-scale production” in first place. This risk surpassed fires and other natural disasters. This makes sense, because ordinary people as well as global financial players are tied into the production sector. Interruptions in production bring huge financial problems, because even banking empires can collapse, and ordinary people get stuck in loans, or even sink.

The financial risks described in the study, plus the growth of cyber threats at the state level, the loss of data – both of individuals and juridical entities – can hit literally everyone. And could it really be an accident that more and more analysts are saying that right now, while there is still an opportunity, it is important to give yourself a safety cushion by generating savings, due to the extreme instability of the financial sector. There are many reasons for such predictions: interest rates in banks are rising, debts, personal and corporate, are accumulating, and stock markets are weathering heavy storms.

Money in the state and in our pockets

Needless to say, global financial risks have an impact on banks in every country and on those banks’ clients. And if, globally, everyday individual bank users aren’t able to exert much influence, at least they can take care of their personal financial well-being. And, before global financial turmoil descends, they should do everything they can not to fall into the trap which, even without the crisis, could put a hole in their pocket.      

So, traditional banks, both in small countries and superpowers, are informing their clients about the following risks at least. First, it is important for clients to know that the value of the securities and the income from them may fluctuate, and that this directly affects the value of the assets belonging to them personally. The second is about economic risk. It is associated with a change in the country’s economic situation, for example, excessive inflation, or when a recession is announced.

Inflation risk, according to many analysts, is among the most serious risks, and is directly related to production. Inflation risk is associated with the depreciation of money (the real cost of capital), a decrease in real monetary income and profits due to inflation. Raw materials, which are used in production, as well as components, become more expensive relative to the increase in the cost of finished products.

It is the manufacturer who is dealt the first blow, and then, along the chain, it impacts others, including, of course, the consumers. During a period of inflation, every day for the same amount of money you can buy fewer and fewer goods and services – compared to how it was before. With inflation, hikes often happen: the finished products of one company may rise in price faster than similar ones among competitors, prices go down and up again, and so on. And as a result everyone ends up facing financial losses.

Political steps into the currency abyss

Next is political risk. Even the most ordinary clients can feel a powerful blow to their wallets due to political decisions at the state level. For example, announcing and falling under sanctions, restricting the ability to make certain investments, develop certain industries and types of business. Political instability makes the economic system in the country unstable as well. The inverse can also happen: economic instability leads to political chaos.

Also, another risk that customers are warned about in reputable banks is currency risk. It is associated with losses due to currency rate fluctuations (and these may also fluctuate due to an unhealthy political climate). For example, when the national currency appreciates in relation to the currency of payment, the exporter experiences a loss because they receive less profit. In turn, for an importer, currency risks arise if the rate of “currency of commodity price” increases in relation to “currency of payment for goods”.

Also, one should not forget about the risk of liquidity: when losses arise, since it is difficult, if not impossible, to sell currencies (or a financial instrument) on the market at a desired time and price. Also, do not forget about investment risks. Due to external factors (in particular, the above-mentioned political games) customers can simultaneously demand the sale or return of their investments, and this can sink any fund or even a large bank.

Credit payments – or debts

All this fits into the general concept of financial risk. And credit risk is separately distinguished. It is associated with the likelihood of non-payment (or substantial delay in payments) of the debt and interests by the borrower to the lender.

And, again, here everything is in one bundle. For example, when there is a crisis of power in a country – there is no clear tax policy and a common financial course (except for taking more and more money from the International Monetary Fund), manufacturers have problems because they can’t clearly plan the work of factories and plants – and, therefore, the schedule of payments on loans taken from banks. In cases like this, production can be re-registered, transferred to other countries, or even completely liquidated. All this hits people who work in production. And they in their turn face problems when paying out their loans.

Yes, when customers apply for certain loans, banks inform them about the various risks, and the first thing they warn about is how prepared a person or organization is to take on a certain amount of money and to pay out the sum in a timely fashion. The risk of default on the loan is directly linked with the inflation risk of the country on the whole. To the latter point, any single family could face salaries remaining the same while purchasing power decreases as prices rise. And as a result, there will be problems paying out the loan.

To sum up the above, the second half of 2019 is not the easiest of times, and the most important thing to be watchful for – problems in the manufacturing sector. After all, it can affect everyone. And the banks are also preparing for this, because everyone remembers well what happened to loan payments in 2008-2009. Draw your own conclusions.

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