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Country Risk

Pertains to how companies spot and manage risks before investing in s country

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6 views24 pages

Country Risk

Pertains to how companies spot and manage risks before investing in s country

Uploaded by

shakyachirag36
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
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Country Risk Analysis

Dr. Ahmad Faraz Khan

1
Country Risk Analysis
Trend 1960~1970: Emergency Outbreaks (War, Coup d’Etat)
=> Raised concern on “Political risk”

1980~1990: Debt Default in Developing Countries


=> International Issue on “Country risk”

2000~ : Increased Transactions with Globalization


=> Risk Management of Emerging Market
Country Risk Analysis
Trend Economic Crises in Emerging Markets

Financial Crisis External Debt Crisis Banking Crisis

Argentina (1982, 2001) Argentina (1983, 2001) Argentina (1989, 1995)


Brazil (1982, 1998-99) Indonesia (1998) Brazil (1987, 1990, 1994)
Ecuador (1986, 1999) Mexico (1999) Hungary (1991)
Egypt (1981, 1989-91) Pakistan (1983) India (1984, 1999)
India (1991, 1993) Russia (1998) Indonesia (1997-98)
Indonesia (1986, 1998) Venezuela (1985) Korea (1981, 1998)
Mexico (1982, 1994-95) Mexico (1989, 1995)
Nigeria (1987, 1999) Nigeria (1989, 1996)
Philippine (1983, 1997) Turkey (1982, 1999)
Russia (1998) Venezuela (1994, 1999)
Turkey (1994)
Venezuela (1984, 1996)
Country Risk Analysis
Trend Major Economic Crises by Region

Latin America South-East Asia Eastern Europe

External Debt Financial Liquidity


Crisis Crisis Crisis
…
… …
Budget Deficit
FDI over-Inflow Current Account Deficit Transition
Currency System Structural Weakness Economy
Country Risk Analysis
Country risk represents the potentially
adverse impact of a country’s
environment on the MNC’s cash flows.
Country Risk Analysis
Country risk can be used:
to monitor countries where the MNC is
presently doing business;
as a screening device to avoid conducting
business in countries with excessive risk;
and
to improve the analysis used in making
long-term investment or financing
decisions.
PART I. THE MEASUREMENT OF POLITICAL
RISK
I. MEASURING POLITICAL RISK

A. Country-specific perspective
- Nonbank MNCs analyze to determine
the investment climate in various countries
- Banks are interested in the country’s ability
to service its foreign debts

7
THE MEASUREMENT OF POLITICAL RISK
B. Political Stability
1. Measured by:
a. Frequency of government changes
b. Level of violence
c. Number of armed insurrections
d. Conflict with other states

8
THE MEASUREMENT OF POLITICAL RISK

C. Economic Factors
1. Indicators of political unrest
a. Rampant inflation
b. Balance of payment deficits
c. Slowed growth of per capita GDP

9
THE MEASUREMENT OF POLITICAL RISK

D. Subjective Factors
1. Profit Opportunity Recommendation
2. Political Risk and Uncertain Property
Rights

10
THE MEASUREMENT OF POLITICAL RISK

3. Capital Flight
a. Definition: the export of savings by a
nation’s citizens because of safety-of-capital
fears.

b. Measurement: use the balance-of-


payment account

11
THE MEASUREMENT OF POLITICAL RISK

c. Causes of capital flight


1) Inappropriate economic policies
2) Expectation of devaluation
3) High political risk

12
PART II. Economic And Political Factors
Underlying Country Risk
II. Economic and Political Factors Primary focus:
How well is the country doing economically?

A. Fiscal Irresponsibility
-high government deficits
B. Monetary Instability
C. Controlled Exchange Rate System
-currency usually overvalued

13
ECONOMIC AND POLITICAL
FACTORS
D. Wasteful Government Spending
-inability to service foreign debt
E. Resource Base
-lack of strong work ethic
F. Country Risk and Adjustment to External Shocks
1. What are the impacts of external shocks:
-how well a nation responds varies

14
ECONOMIC AND POLITICAL
FACTORS
2. Key Indicators of Country Risk
a. Relative size of government debt
b. Money expansion
c. Existence of government-imposed
barriers to market forces

15
ECONOMIC AND POLITICAL
FACTORS
2. Key Indicators of Country Risk (con’t)
d. Level of tax rates
e. Amount of government-owned
firms
f. Political and fiscal responsibility
g. Amount and extent of
corruption

16
ECONOMIC AND POLITICAL
FACTORS
Key indicators of economic health
a. Structural incentives
b. Legal structure
c. Clear incentives to save
d. Open economy
e. Stable macroeconomic
policies
17
Techniques of Assessing Country Risk

A checklist approach involves rating and


weighting all the identified factors, and then
consolidating the rates and weights to produce
an overall assessment.

The Delphi technique involves collecting various


independent opinions and then averaging and
measuring the dispersion of those opinions.
Techniques of Assessing Country Risk

Quantitative analysis techniques like


regression analysis can be applied to
historical data to assess the sensitivity of a
business to various risk factors.

Inspection visits involve traveling to a


country and meeting with government
officials, firm executives, and/or consumers
to clarify uncertainties.
Actual Country Risk Ratings Across Countries

Some countries are rated higher according to


some risk factors, but lower according to others.

On the whole, industrialized countries tend to be


rated highly, while emerging countries tend to
have lower risk ratings.

Country risk ratings change over time in


response to changes in the risk factors.
Country Risk Analysis
Comparison of Major CRR Agencies

K Exim OECD S&P Moody’s EIU


Premise Seoul Paris NY NY London
Duration 1977 1998 1941 1949 1997
Number 167 145 104 109 100
Intervals F Q F F Q
Category 9 8 22 22 12
Example 1- OECD’s CRAM
Country Risk Assessment Model (CRAM)

The CRAM is developed starting from an economic-financial risk score

Developed through a quantitative risk analysis model based on three


macro-variables: payment experience, financial situation and economic
situation.

These three variables form an aggregated economic-financial risk score,


which is “qualitative adjusted” with the political risk score.

That is, the “political situation” of a country is used to change, in better or


worse, the score in order to have an overall country risk score.

22
23
Example 2- Economic Intelligence Unit’s Country
Risk Model
Country Risk Model is an easy-to-use web-based service.
It provides risk scores (on a scale from 0-100)
Ratings of six risk categories
 Sovereign debt risk
 Currency risk
 Banking sector risk
 Political risk
 Economic structure risk
 Overall country risk
The scores can be compared across countries and over time.

24

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