Risky Business: How to Invest During a Humanitarian Crisis
Last week we published three tips for entering the market of a country emerging from a humanitarian crisis. But what if you’re conducting business in a country currently experiencing a humanitarian crisis – how do you know if the crisis is worsening and investments may be at risk? This is the second in a series […]
Last week we published three tips for entering the market of a country emerging from a humanitarian crisis. But what if you’re conducting business in a country currently experiencing a humanitarian crisis – how do you know if the crisis is worsening and investments may be at risk?
This is the second in a series of posts written by OnFrontiers expert and humanitarian response practitioner Benjamin Barrows. Ben is an expert in economic and community development programs across the Middle East and Africa. He specializes in engaging with private sector actors and governments to prepare for disaster, increase resilience, and recover from natural disaster and conflict.
When conducting business amidst a humanitarian crisis, Ben recommends monitoring various expressions of market integration and resilience. Here’s his advice on five factors to watch during a crisis:
#1: Market operations
During an emergency, the ability of markets to move goods or services from one place to meet demand in another – rapidly and without spikes in price or gaps in supply – is critical. This is as true for staple commodities, such as rice or maize, as it is for aggregate used in concrete, for example.
It’s important to remember that humanitarian crises have a tendency to balkanize market areas. For example, floods can cut off the connection between production and consumption areas while civil unrest can increase transportation costs due to risk perceptions, cutting off low-margin goods.
#2: Aid interventions
The actions of the host government and international aid community are crucial in determining how a crisis will unfold. Massive importation and distribution of basic goods and foodstuffs by the government, UN, and NGOs can distort local, national, and regional markets for months, creating cash flow issues for enterprises that are stuck holding inventory. Conversely, cash-based interventions by the government or humanitarian actors (wherein affected populations are given cash grants) can stimulate demand in target areas and along the value chains of demanded goods and services.
#3: Market history and seasonal patterns
Markets that were poorly integrated and not resilient before a crisis will be more susceptible to the effects of shock and may experience a slower recovery. For areas that have not experienced acute or chronic emergency in the recent past, seasonality may also be a good indicator of the desirability, or at least the timing of investment: are current dynamics an expression of seasonal fluctuation, within reasonable limits? In past emergencies, was this good, service, or geographic area stimulated by recovery? Do the inhabitants of a given area traditionally migrate to or from a given area when under economic stress? If market disintegration continues, how will market actors and consumers behave?
#4: National economic policies and trends
Government policies to import certain commodities and subsidize their price in national markets can mask economic warning signs. The government may be artificially obscuring risk and volatility in a way that can create vulnerability to changes in the market, which can destroy value for investors and businesses and harm vulnerable populations. Monitoring macroeconomic indicators – such as inflation, foreign debt, and fiscal and monetary policy – and juxtaposing it against historic trends and future outlooks of a given business or sector can help guard against being caught unawares in an investment strategy.
#5: Regional and international comparisons
It’s also worth keeping an eye on how national markets compare to international analogs. Is the price per unit of a given good similar to the regional or international average? If the price of a good is unusually high or low, what is driving that anomaly? And what would make it revert to its normal amount?
If your monitoring of these issues points toward unstable or worsening conditions, Ben suggests that spreading the costs and risks across co-investors or partners (mutualization of risk) is one way to hedge against volatility. Large NGOs and sophisticated national businesses may be open to co-creating opportunities that are tailored to succeed in a context of instability and pessimistic short- and medium-term outlooks. In doing so, you can position yourself to benefit from the upside of a recovery while limiting your downside risk.
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Featured image was taken by Department for International Development/Russell Watkins in Pakistan.