Introduced by Assoc. Pr. Dr. Truong Quang Thong The Faculty of Banking – UEH (based on Pr. H. Bouchet’s slides) August 2012 INTERNATIONAL FINANCE TÀI CHÍNH QUỐC TẾ Lecture 8: Country Risk Analysis 1 Overview  Identify common factors and indicators used to measure a country’s political risk.  Identify common factors used to measure a country’s financial and economic risks.  Explain the techniques used to measure country risk 2 Country Risk Analysis – Why?  To assess risk versus opportunity prospects.  To screen out excessively risky country.  To use in a proposed capital budgeting project and to assess gain & loss probability outcomes of cross-border investments. 3 What is country risk?  Country risk is the possibility that a foreign country’s borrower may be unable or unwilling to fulfill its debt servicing obligations toward s foreign lender and/or investor.  Country risk is composed of a complex combination of political, transfer and systemic risk. 4 Main public and private sources of country risk intelligence  IMF/ World Bank  IIF / BIS / OECD  ADB, EBRD  Eximbank  S&P, Moody’s  …. 5 Main components of country risk  Political risk  Economic risk  Financial and transfer risk  Exchange risk  Cultural environment risk  Legal and contractual risk  Regional contamination risk  Systemic risk 6 Risk assessment in the global firm  Political risk is the risk incurred by the lenders or investors that the repayment of a loan or the repatriation of an investment be restricted by the arbitrary decision of the state (confiscation, repudiation, nationalization…).  Transfer risk is the risk that a foreign country may impose restriction on remittances of capital, dividends, interest, fees, debt payments … due to exchange restrictions, discretionary balance of payment policies…  Systemic risk is a risk stemming from the spill-over (or contamination) effect of financial imbalances in a region or in a market. 7 Political Risk Factors  Attitude of the government vis à vis FDI.  Suden shift in government’ stance (contract repudiation, change in legal and regulatory framework…)  Attitude of consumers in the host country.  Attitude of the government  Blockage of fund transfer  Currency inconvertibility  Civil war, expropriation, confiscation  Capital repatriation and dividend remittance constraints  Bureaucracy 8 Techniques to Assess Political Risk  Checklist approach  Examine all political factors that effect a country’s risk: the Prince Model.  Delphi technique  Collect independent opinions on country risk  Establish surveys 9 The Prince Model 1. Identifying the power structure of a nation (key individual actors whose degree of influence or concern can effect the outcome of an issue important to international business. 2. Recording the position of major individuals or groups according to whether it supports, is neutral toward or opposes the action or event 3. Assigning probability calculation 4. Estimating likelihood of business gain or loss 10 [...]... structural, external…)  Example of some variables:  Import cover of official reserves  Short term debt/X+R  … Quantifying Country Risk Weights Political Risk Scoring Poli factor 1 - Poli factor 2 - 30% - Poli factor 3 30% Economic Risk Scoring Overall Country Risk Scoring Structural Risk Scoring 20 % Debt Management Debt Scoring - Eco factor 1 - 20 % 30% 50% 20% Eco factor 2 … factor 3 Eco - … 30% 40%...Various approaches to country risk assessment  Qualitative analysis: financial, macroeconomic, legal, regulatory and political parameters…  Quantitative approach: rating and scoring  Pricipal component analysis  Econometric approach and modelization  Logit analysis  … Quantitative approache: Rating  Use of a weighted average of factors... Rating Overall Scoring Rating 91-100 AAA 81-90 AA 71-80 A 61-70 BBB 51-60 BB 41-50 B 31-40 CCC 21-30 CC 11-20 C 0-10 D Very good Medium Bad Very risky 15 Foreign Risk Decision Matrix Financial and transfer Risk Poor Good Acceptable Zone Good Political Risk High Risk Zone Poor Decision depending on market and profit potential . 2012 INTERNATIONAL FINANCE TÀI CHÍNH QUỐC TẾ Lecture 8: Country Risk Analysis 1 Overview  Identify common factors and indicators used to measure a country s political risk.  Identify common. risk  Political risk  Economic risk  Financial and transfer risk  Exchange risk  Cultural environment risk  Legal and contractual risk  Regional contamination risk  Systemic risk 6 Risk assessment. factors used to measure a country s financial and economic risks.  Explain the techniques used to measure country risk 2 Country Risk Analysis – Why?  To assess risk versus opportunity prospects.  To