Strategic Risk Management for Developing Countries The Colombia Case Study 1.pdf

Strategic Risk Management for Developing Countries: The Colombia Case Study1 Stijn Claessens2 Jerome Kreuser3 Roger Wets4 1. Introduction Uncertainty makes economic and project management more difficult for any entity. This is especially true for sovereigns that have experienced substantial financial volatility and shocks throughout the nineties, especially those with substantial debt and commodity price exposures. Furthermore, the development of a strategic approach at the country level for the analysis of that uncertainty has lagged behind as most approaches exclude, for example, trade flows and fiscal dimensions. A World Bank research project undertook to rectify that situation. In this paper, we present a case study for Colombia of the tools developed in that research project. We only look at one small aspect of the issues in order to illustrate how these tools could be applied and what might be examined. 2. Strategic approach to ALM is important, especially for developing countries. Global financial markets have been very volatile in recent decades with large changes in commodity, foreign exchange, interest rates, and capital flows. Many developing countries have large exposures to these risks. They often have large external debts and considerable foreign exchange reserves, exposing them to interest and exchange rates risks. Many developing countries depend on (primary) commodity exports for generating foreign exchange, or need to rely on imports for energy and to supplement basic food supplies. Adverse movements in international commodity prices can affect them greatly. All these risks have played a role in raising the debt burdens and negatively affecting economic performance of many developing countries. Uncertainty makes economic and project management more difficult for any entity. This is even more so in developing countries. On the upside, developing countries have more difficulty dealing with the booms resulting from commodity prices increases.