Country Risk Analysis
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
Economic Crises in Emerging Markets Trend
Financial Crisis External Debt Crisis Banking Crisis
Argentina (1982, 2001) Brazil (1982, 1998-99) Ecuador (1986, 1999) Egypt (1981, 1989-91) India (1991, 1993)
Indonesia (1986, 1998) Mexico (1982, 1994-95)
Argentina (1983, 2001) Indonesia (1998)
Mexico (1999) Pakistan (1983) Russia (1998) Venezuela (1985)
Argentina (1989, 1995) Brazil (1987, 1990, 1994) Hungary (1991)
India (1984, 1999) Indonesia (1997-98) Korea (1981, 1998) Mexico (1989, 1995)
Country Risk Analysis
Major Economic Crises by Region Trend
Latin America South-East Asia Eastern Europe
External Debt Crisis
…
Budget Deficit FDI over-Inflow Currency System
Financial Crisis
…
Current Account Deficit
Structural Weakness
Liquidity Crisis
…
Transition 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
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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
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
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THE MEASUREMENT OF POLITICAL RISK
D. Subjective Factors
1. Profit Opportunity Recommendation
2. Political Risk and Uncertain Property
Rights
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-
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THE MEASUREMENT OF POLITICAL RISK c. Causes of capital flight
1) Inappropriate economic policies 2) Expectation of devaluation
3) High political risk
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
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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
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
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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
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
Techniques of Assessing Country Risk
A
checklist approach
involves rating andweighting 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
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
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.
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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.
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