Location Risk Monitoring

Q4 2016, Supply Wisdom Monitor: Country Risk Index

Written by Sowmya MK

Q4 2016 Supply Wisdom Monitor: Country Risk Index covers global outsourcing markets and ranks key locations based on the Composite Risk score, a comprehensive measure of important risk criteria. Ten major outsourcing markets have been analysed in this index using the Supply WisdomSM framework, covering categories such as Geo-Political, Financial, Scalability, Legal, Business, Infrastructure, Macro-Economic, and Quality of Life.

Q4 2016 Highlights:

  1. The top two spots continue to be dominated by China (#1) and India (#2), key global markets for IT-BPM services, owing not only to the cost arbitrage, but also to the scale of available talent and growing support for businesses through incentives and business reforms.
  2. The Philippines climbed two spots, moving from #7 to #5 owing to decline in the natural disaster risk. However, a charged political atmosphere with President Duterte’s pivot to China, provoking remarks against the US as well as growing threat perception from crime in the southern part of the country could shape investor sentiment in the mid to long term.
  3. Mexico ranks #6, declining 1 spot from the previous quarter, primarily due to a shift in the Macro-Economic Risk level from Low to Moderate level risk driven by increasing inflation rates and plunging currency (Mexican Peso) values to new lows, which was fueled by concerns over the policies of the recently elected US President Donald Trump.

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Rank Country Overall Risk Score
Q3 2016 Q4 2016
0 4.56 4.53

China has focused on infrastructure expansion as a strategy to attract investments in it IT-BPO sector. The country has over 1,500 national and provincial development zones which relish preferential policies to help nurture and promote technological innovation, free trade and other key drivers of economic growth. However, key challenges in terms of soaring cybercrime levels, bureaucratic hurdles prevail in the country which affects the business operations.

Geo-Political Risk witnessed decline during the quarter driven by an improvement in the corruption Perception Index rank (the country’s ranks improved by 4 ranks to 79th position) released by Transparency International (TI).
Frequent power cuts including minor brown outs caused the Infrastructure Risk to go up in Q4 2016
Inflationary pressures triggered Macro-Economic Risk to increase during the quarter.
0 4.73 4.73

As one of the key IT-BPM markets globally, India continues to attract investors and features prominently among the expansion plans of companies looking to leverage the country’s vast talent pool, cost arbitrage as well as technology capability. However, developments in buy-side markets such as Brexit in the EU and new US administration’s stance against the outsourcing will drive and shape the industry growth/margins as well as the outlook in the mid to long term.

Macro-Economic Risk slid marginally in Q4, due to falling inflation rates triggered by demonetization initiatives.
India’s Scalability Risk witnessed an imperceptible increase; the Indian IT-BPM industry stays vulnerable to external factors, primarily emerging from buy-side markets.
While the Geo-Political Risk remains at a Moderate level, recent quarters have highlighted the need for robust BCP procedures in the light of major demonstrations; seasonal outbreaks of vector-borne diseases also contribute to the risk.
0 4.99 5.04

Hungary’s ICT sector is a key contributor to the country’s GDP and employment. In Western Europe, the country remains an attractive destination with regard to foreign investment with many leading companies investing in the country. EU membership had a positive impact on the Hungarian economy and had provided several competitive advantages to investors in the country. However, key challenges such as shortage of skilled labor pool and tax frauds persist.

Macro-Economic risk spiraled up during the quarter due to increase in fiscal deficit and high volatility of currency exchange rates.
Geo-Political Risk climbed up slightly attributing to increase in the number of large scale protests.
Financial Risk declined during the quarter driven by a slower pace of rental growth rate.
0 5.07 5.08

A business friendly environment, attractive corporate tax rates and good English-speaking workforce are among Ireland’s USPs that attract multinationals to invest into the country. Post Brexit, Ireland is the location of choice among several firms planning to relocate or expand their operations owing to its strategic advantages of being in the EU.

Volatility in Euro against Dollar during the quarter triggered the Macro-Economic Risk to increase in Q4.
Financial Risk, declined during the quarter driven by a drop in the rental growth rate and lodging costs.
Infrastructure Risk shrank during the quarter as the risk of power cuts declined, due to a huge contingency balancing reserve services to balance the electricity system. However, power outages are common during adverse weather conditions.
+2 5.25 5.20

The Philippines’ has continued to gain ground as a BPO market and the administration has further set ambitious targets through its six-year roadmap to increase the country’s share of the outsourcing sector at a global level. While the cost advantage, human capital and business incentives are among the strengths, the unfolding developments on the Philippines’ political stability and impact of new US administration’s policies on the domestic IT-BPM market are things to watch out for.

While lower Natural Disaster Risk contributed to the dip in Geo-Political Risk, President Duterte’s provoking on U.S troop presence in the Philippines cast a shadow over the political stability in the country.
Legal Risk remains unchanged and Moderate; issues such as software/digital piracy and delays in enforcing contracts prevail in the country.
The fallout from the new US administration’s protectionist policies and President Duterte’s focus on renewing ties with APAC regional partners will drive Scalability Risk in the long run.
-1 5.16 5.22

Mexico hosts several leading firms in the IT-BPO sector that employ highly skilled workers. The country, which has one of the biggest IT markets in Latin America, continues to expand at a rapid pace. Nearshore proximity, multilingual labor pool, and cultural compatibility are added advantages for US based businesses. However, widespread corruption, regulatory challenges, and high crime rates are key concerns for businesses operating in the country.

Macro-Economic Risk surged during the quarter driven by soaring inflation rates and plunging currency (Peso) values.
Geo-Political Risk soared during the quarter driven by the decline in the Corruption Perception Index rank released by Transparency International (TI).
Legal Risk remained at a Moderate level. Increasing cybercrime is an issue in the country.
-1 5.23 5.23

Vietnam’s IT outsourcing sector has witnessed increased revenues, particularly through exports. Increase in use of new tech platforms such as cloud, big data, and analytics help in boosting the demand. Nearshore proximity towards Japan and Korean outsourcing markets is an added advantage for the outsourcing market. The government supports the expansion of outsourcing sector by investing in digital infrastructure and by offering several incentives. However, shortage of skilled labor pool still prevails in the country.

Macro-Economic Risk increased during the quarter attributable to surge in inflation rates and high currency volatility.
Financial Risk contracted slightly because of slower pace of rental growth rate.
Geo-Political Risk increased slightly due to increased natural disaster risk.
0 5.34 5.34

As a favored nearshore location for outsourcing, Colombia has grown as one of the largest IT service providers in Latin America. The recently inked historic pact between the government and FARC fighters (Colombia’s biggest rebel group) offers a positive geo-political outlook for the country. However, key challenges such as power supply disruptions, rampant corruption and increasing cybercrime remain.

Macro-Economic Risk contracted in Q4, owing to narrowing trade deficit and lower QoQ inflation rate.
Financial Risk for the quarter expanded due to the higher office space rental growth than the quarter before.
The decline was driven by lower Natural Disaster and Social/Security Risk compared to Q3 2016.
0 5.39 5.35

As the macro-economic conditions signal a potential improvement, Brazil, the seventh largest ICT market in the world, will benefit from further job creation fueled by investments in the IT services as well as BPO markets. Its location advantage and cultural affinity also further its appeal as a popular nearshore location.

Legal Risk narrowed in Q4, with the latest available IP data reflecting a YoY increase in the number of patent grants in the country in 2015.
Widening trade deficit as well as higher forex fluctuation during the quarter led to the uptick in Macro-Economic Risk.
Negative rental growth rate as well as a drop in lodging tariffs led to lower Financial Risk QoQ.
0 5.44 5.49

While the country posted weak economic performance in 2016 and recorded a slowdown in overall investments, the IT-BPO sector in the country, a significant share of which is represented by foreign firms, continues to grow. Application development and support, IT enabling services and user support/service desk remain among the key offerings in the IT market.

Currency fluctuation and increasing fiscal deficit during the quarter resulted in higher Macro-Economic Risk.
The climb in Geo-Political Risk was driven by increased seismic activity in the region.
Scalability Risk increased on the back of low industry growth rate, with the IT services and software market expected to grow at a CAGR of 5.9% between 2013 and 2020.
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