As a country strives to be resilient, it must create and sustain a resilient set of institutions that can provide sound management of finances, diverse revenue streams and, the ability to attract business investment, allocate capital ad build financial reserves (emergency funds).
A robust economic system is critical to sustaining the investment that a resilient society needs to maintain its infrastructure and provide for its community. The leadership realizes the importance of flexible institutions with policies that attract direct foreign investment. Its agile government helps to create contingency funds that both the private and public sectors can use to respond to emergencies and unforeseen events. As a result, the society is better able to respond to changing economic conditions and pursue long-term prosperity.
These resilient societies are flexible, redundant, robust, resourceful, reflective, inclusive, and integrated in their approach. They strive to eliminate the following threats to resiliency.
- Economic risk: This risk refers to a country’s ability to pay back its debts. A country with stable finances and a stronger economy should provide more reliable investments than a country with weaker finances or an unsound economy.
- Political risk: This risk refers to the political decisions made within a country that might result in an unanticipated loss to investors. While economic risk is often referred to as a country’s ability to pay back its debts, political risk is sometimes referred to as the willingness of a country to pay debts or maintain a hospitable climate for outside investment. Even if a country’s economy is strong, if the political climate is unfriendly (or becomes unfriendly) to outside investors, the country may not be a good candidate for investment.
- Sovereign risk: This is the risk that a foreign central bank will alter its foreign exchange regulations, significantly reducing or nullifying the value of its foreign exchange contracts. Analyzing sovereign risk factors is beneficial for potential investors. Aa sovereign risk analysis creates a macroeconomic picture of the operating environment (such as inflation, price levels, rate of growth, national income, gross domestic product (GDP) and changes in unemployment.
The greater these risk factors, the more fragile the country and the more difficult the climb to resiliency.