COUNTRY RISK ANALYSIS

COUNTRY RISK

ANALYSIS

BY

Country Analysis

Country analysis involves the examination and interpretation of a nation’s economic, social and political environment. The analysis offers a comprehensive overview of a country.

Objectives

To explain the techniques used to measure country risk; and

To explain how MNCs use the assessment of country risk when making financial decisions.

Why Country Risk Analysis Is Important

Country analysis is useful for: Investors in the financial market Companies intending to set up a subsidiary Companies wishing to enter a new market People wishing to reside in the country

Why Country Risk Analysis Is Important?

Country risk analysis can be used:

To monitor countries where the MNC is currently doing business.

As a screening device to avoid conducting business in countries with excessive risk.

To revise its investment or financing decisions in light of recent events.

FACTORS

FACTORS

ECONOMIC RISK

TRANSFER RISK

EXCHANGE RATE RISK

FACTORS

LOCATION RISK

SOVEREIGN RISK

POLITICAL RISK

Types of Country Risk Assessment

A macro-assessment of country risk is an overall risk assessment of a country without considering the MNC’s business.

A micro-assessment of country risk is the risk assessment of a country with respect to the MNC’s type of business.

Applications ofCountry Risk Analysis

As a result of the crisis that culminated in the Gulf War in 1991, many MNCs reassessed their exposure to country risk and revised their operations accordingly.


The 1997–98 Asian crisis caused MNCs to realize that they had underestimated the potential financial problems that could occur in the high-growth Asian countries.


Following the September 11, 2001 attack on the United States, some MNCs reduced their exposure to country risk by downsizing or discontinuing their business in countries where U.S. firms may be subject to more terrorist attacks.

Techniques of Assessing Country Risk

The Checklist approach involves rating and weighting all the macro and micro political and financial factors to derive an overall assessment of country risk.

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 the business to various risk factors.

Inspection visits involve traveling to a country and meeting with government officials, firm executives, and consumers to clarify uncertainties.

FIn 763: Lecture 2 15

What Factors do Ratings include?

Standard & Poors and Moody‘s are the two largest

rating agencies.Other agencies: Duff & Phelps, Fitch, Political Risk Services, Beri …

S&P concentrates on 8 categories to come up with their ratings

Each of this categories is related to the two major sources of risk: economic and political risk

RISK Analysisof INDIA

INDIA RANK 12TH IN THE GROWING ECONOMY

GDP GROWTH

FDI & FPI

EASE OF

DOING BUSINESS RANK ( 181 COUNTRIES) CHANGE

2009 2008

DOING BUSINESS 122 126 4

STARTING A BUSINES 121 126 -7DEALING WITH CONSTRUCTION

PERMITS 136 131 -5

EMPLOYING WORKERS 89 89NO

CHANGE

REGISTERING PROPERTY 105 114 -9

GETTING CREDIT 28 25 -3

PROTECTING INVESTORS 38 33 -5

PAYING TAXES 169 167 -2

TRADING ACROSS BORDER 90 81 -9

ENFORCING CONTRACTS 180 180NO

CHANGE

CLOSING A BUSINESS 140 140NO

CHANGE

Overall country risk

ratings

Current monthPrevious month

12 months ago

India BBB BBB -

Bangladesh B B -

Pakistan B B -

Sri Lanka BB BB -

THANK U!!!

ECONOMIC RISK

Economic Risk is the significant change in the economic structure or growth rate that produces a major change in the expected return of an investment.

Arises from the changes in fundamental economic policy goals

Economic structure risk ratings

Current monthPrevious month

12 months ago

India BBB BBB -

Bangladesh CCC CCC -

Pakistan BB BB -

Sri Lanka B B -

TRANSFER RISK

Transfer Risk is the risk arising from a decision by a foreign government to restrict capital movements. Restrictions could make it difficult to repatriate profits, dividends, or capital.

It usually is analyzed as a function of a country's ability to earn foreign currency, with the implication that difficulty earning foreign currency increases the probability that some form of capital controls can emerge.

EXCHANGE RATE RISK

Exchange Risk is an unexpected adverse movement in the exchange rate. Exchange risk includes an unexpected change in currency regime such as a change from a fixed to a floating exchange rate.

A country's exchange rate policy may help isolate exchange risk. Managed floats, where the government attempts to control the currency in a narrow trading range, tend to possess higher risk than fixed or currency board systems.

Floating exchange rate systems generally sustain the lowest risk of producing an unexpected adverse exchange movement.

The degree of over- or under-valuation of a currency also can help isolate exchange rate risk.

Currency risk ratings

Current month

Previous month

12 months ago

India BBB BBB -

Bangladesh BB BB -

Pakistan B B -

Sri Lanka BB BB -

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LOCATION RISK

Location or Neighbourhood Risk includes spillover effects caused by problems in a region, in a country's trading partner, or in countries with similar perceived characteristics.

Geographic position provides the simplest measure of location risk. Trading partners, international trading alliances, size, borders, and distance from economically or politically important countries or regions can also help define location risk

SOVEREIGN RISK

Sovereign Risk concerns whether a government will be unwilling or unable to meet its loan obligations, or is likely to renege on loans it guarantees.

Sovereign risk can relate to transfer risk in that a government may run out of foreign exchange due to unfavorable developments in its balance of payments

Sovereign risk ratings

Current monthPrevious month 12 months ago

India BBB BBB -

Bangladesh CCC CCC -

Pakistan B B -

Sri Lanka B B -

POLITICAL RISK

Political Risk concerns risk of a change in political institutions stemming from a change in government control, social fabric, or other non-economic factor. This category covers the potential for internal and external conflicts, expropriation risk and traditional political analysis.

Political risk ratings

Current month

Previous month

12 months ago

India BB BB -

Bangladesh CCC CC -

Pakistan CC CC -

Sri Lanka B B -

Year Inflation rate (consumer prices)

2003 5.40%

2004 3.80%

2005 4.20%

2006 4.20%

2007 5.30%

2008 6.40%

2009 8.30%

2010 10.70%

COUNTRY PERCENTAGE

INDIA 7-12%

PAKISTAN 13-22%

SRI LANKA 7-12%

BANGLADESH 13-22%

PERCENTAGE OF PEOPLE WHO HAVE GIVEN BRIDE IN LAST 12 MONTH

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COUNTRY RISK ANALYSIS