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Country Risk Analysis PPT SecD Group10

Country risk analysis involves assessing the potential risks and rewards of doing business in a foreign country. It considers political, financial, and economic factors that could negatively impact a firm's cash flows. Country risk is measured using factors like government stability, currency volatility, and economic conditions. Firms use country risk analysis to screen countries, monitor existing operations, and evaluate new projects. It allows comparisons of risks across multiple nations to determine the most suitable locations for investment.

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33% found this document useful (3 votes)

4K views23 pages

Country Risk Analysis PPT SecD Group10

Uploaded by

iamnotpeter

We take content rights seriously. If you suspect this is your content, claim it here.

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Download as PPTX, PDF, TXT or read online on Scribd

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Country Risk Analysis

Definition
 Country Risk Analysis is assessment of
potential risks and rewards from
doing business in country

Country risk represents potentially
adverse impact of a country’s
environment on the cash flow of the
firm

Risk perception

 Sovereign risk applies specifically to

the creditworthiness of governments
as borrowers

 Political
risk refers to political factors
that might impair a borrower’s ability
to pay

Importance
 Used to monitor countries where the firm is
presently engaged in international
business

 Used by the firm as a screening device to
avoid countries with excessive risk


 Used to assess particular forms of risk for a

proposed project considered for a foreign
country
Awareness of Country Risk
 Crisis in Mexico 1982
 Crisis in China in 1989
 1997 East Asian Currency crisis
 Crisis in Iraq
 Crisis in Iran, Afghanistan
 Recent sub-prime crisis starting in USA

Country Risk Analysis 12/22/09 6
Political Risk Factors

 Attitude of host government

 War
 Currency inconvertibility
 Bureaucracy
 Blockage of fund transfers
 Corruption



Country Risk Analysis 12/22/09 7
Financial Risk Factors

 Current and potential state of the

country’s economy
 Financial distress
 Additional host government
restrictions
 Moratorium on fund transfer
 Interest rates, exchange rates and
inflation

Country Risk Analysis 12/22/09 8

Economic Conditions

 Diversification of the economy

 Degree of reliance on a few key
exports and the effects of a decline
in the worldwide prices of those
exports
 Exchange rate devaluation
 Frequency of government intervention
in the money market and the ceilings
of interest rates
 Possibility of recession
Country Risk Analysis 12/22/09 9
Subjective factors

 Country’s attitude towards private

enterprise
 Risk of currency devaluation
 Risk of government`s income
reduction
 External flows dependence,
 Productivity restrictions
 Social pressures
 Attitude of consumers in the host
country Country Risk Analysis 12/22/09 10
Types of Country Risk
Assessment
 Macro-assessment of country risk

 Country characteristics that affect profits

 Micro-assessment of country risk


Country Risk Analysis 12/22/09 11

Use of country risk
assessment
 Incorporating country risk in capital budgeting

 Adjustment of the discount rate

 Adjustment of the estimated cash flows

 Application of country risk analysis

12
Indicators of high country
risk
 Large government deficit relative to GNP
 High rate of money expansion
 Substantial government spending yielding low rate of
return
 High taxes
 Vast state-owned firms
 Attitude that government’s role is to maintain living
standards
 Pervasive corruption
 Absence of basic government institutions
  almost all are common for the developing
countries!!!!!!

Country Risk Analysis 12/22/09 13

Measurement of Country
Risk
 One way to measure Country Risk is checklist
approach, and it involves:
v Assigning values and weights to political and
financial risk factors,
v Multiplying the factor values with their weights, and
summing up to give the political and financial risk
ratings,
v Assigning weights to the risk ratings, and
v Multiplying the ratings with their weights, and
summing up to give the country risk rating


Country Risk Analysis 12/22/09 14

Country Risk Measurement

Country Risk Analysis 12/22/09 15

Derivation of Country Risk

Country Risk Analysis 12/22/09 16

Comparing Risk Ratings
 An MNC may evaluate country risk for several
countries, perhaps to determine where to
establish a subsidiary
 Foreign investment risk matrix (FIRM)
 FIRM is used to develop a matrix that
categorizes countries based on political risk
and economic risk as
v Acceptable
v Unacceptable
v Uncertain for investment
 The importance of political risk versus economic
risk varies with the intent of the MNC

Country Risk Analysis 12/22/09 17

FIRM
2 dimensional mapping of


 Political risk component

 Economic risk component


 How an MNC analyses risk

 Stage1 – Use FIRM - to eliminate risky countries
 Stage2 – Country risk profile
 Stage3 – Investment Risk analysis
 Stage4 – Foreign investment risk Audit

Country Risk Analysis 12/22/09 18

World Threat Perception - Terrorism
 Terrorism has added a new dimension in the
country risk assessment
 Middle East
› Iraq
› Iran – nuclear ambition, internal consternation
› Israel – Hamas-Israeli cycle of violence
 Asia
› Afghanistan – warlords back in the game, on their own
side
› Indonesia – Jemmah Islamia, Al-Qaeda’s kissing cousin
› Philippines – domestic terrorists

Country Risk Analysis 12/22/09 19

Global Terrorism Index
 The Index is designed to assess the risk of terrorism in
each country, or against that country’s interests
abroad, over the next 12 months


 It does this by qualitatively rating five key factors for each

country – Motivation, Presence, Scale, Efficacy and
Prevention – and then giving each of these a
quantitative weighting in order to determine its overall
Terrorism Risk


20
Country Risk Analysis 12/22/09 21
Summary
 Potential risk & rewards of doing business in a
country
 Factors
› Political
› Financial
› Economic
 Risk Assessment
 Measurement & comparison of country risk
 Terrorism

Country Risk Analysis 12/22/09 22




 THANK YOU