Eduardo Martnez Patricio Novales Soraya Snchez

2012, International Economics course Page 0

INDEX

Introduction Macroeconomic Data GDP Inflation Unemployment Deficit Balance of Payment External Debt Current Account Deficit International Reserves IMF Report Ireland SWOT Matrix Mexico SWOT Matrix Conclusions Sources

2 3 3 4 5 6 7 7 7 9 12 12 13 14 14 16 17

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INTRODUCTION

Country risk refers to the risk of investing in a country, dependent on changes in the business environment that may adversely affect operating profits or the value of assets in a specific country. For example, financial factors such as currency controls, devaluation or regulatory changes, or stability factors such as mass riots, civil war and other potential events contribute to companies' operational risks. This term is also sometimes referred to as political risk; however, country risk is a more general term that generally refers only to risks affecting all companies operating within a particular country. Base on the definition of Country Risk, in this research we are going to examine and evaluate the development of the main Macroeconomics and Balance of Payment data for Ireland and Mexico. All this data will be compared to ideal levels that IMF and WB suggest as a good indicator of the performance of the country, in order to determine the level of risk that the countries have being showing from 2010, and make estimations of forecast scenarios for 2013 and 2014. Creating the present country risk, for both countries, we will find conclusive answers on about accepting or not some credit risks, especially those ones represented by the possibility of restriction of payment, imposed by a country. Moreover, it is important to observe that the capacity of payment of a debtor may be deeply threatened if some macroeconomic instability affects its commercial environment, constraining its activity as a whole. Nowadays, such issues are getting more relevant around the world, for the so called globalization has led the countries towards economic disclosures, essential for keeping them competitive. So, an increasing number of companies are taking advantage of the external trade, which represents huge business opportunities as much as the possibility of buying products and, mainly, the development of new profitable and promising markets.

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MACROECONOMICS DATA GDP

Gross domestic product is defined as the market value of all officially recognized final goods and services produced within a country in a given period. It is an extremely useful indicator to ponder the position of a given economy, and according to World Bank (WB) terms, it has to attain a yearly growth of 2% to be considered as positive. That said, the analysis of data provided by Mexico and Ireland for the 2007-2012 period points a high degree of disparity. COUNTRY Ireland Mexico 2010 0.43% 5.42% 2011 0.36% 3.8% 2012 0.7% 3.6% 2013 2.41% 3.67% 2014 3% 3.82% Average 1.21% 4.06%

20 years evolution

15 10 5 ireland mexico

0
-5 -10
Source: ttp://www.econstats.com

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Inflation

Rise in the general level of prices of goods and services in an economy over a period of time. In accordance to the WB, a inflation over 3% means risk of overheating in the economy. For the chosen countries it is not a meaningful problem at the moment and coming years. We will like to remark the brilliant macro reforms made in Mexican monetary policy to curve inflation, a major problem in the past. Additionally, Ireland has been able to underperform Eurozone average inflation in a very significant way.

COUNTRY Ireland Mexico

2010 1.56% 4.15%

2011 1.12% 3.37%

2012 0.62% 3.12%

2013 1.4% 3%

2014 1.61% 3%

Average 1.48% 3.33%

20 years evolution

40 35

30
25 20 15 10 Ireland

Mexico

5
0

Source: ttp://www.econstats.com

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Unemployment

The unemployment rate is a measure of the prevalence of unemployment and it is calculated as a percentage by dividing the number of unemployed individuals by all individuals currently in the labor force. For the WB, any rate of this item over 9% is assessed as harmful for a economy; taking this into account, Ireland is still suffering the aftermath of housing and banking sector collapse with a rattling labor market. By contrast Mexico is near and will be near to full-employment in coming years. COUNTRY Ireland Mexico 2010 13.63% 5.37% 2011 14.3% 4.5% 2012 13.9% 3.9% 2013 13.2% 3.5% 2014 12.4% 3.5% Average 12.5% 4.1%

20 years evolution

16 14 12 10 8 6 4 2 0

Ireland

mexico

1997

1995

1999

2001

2003

2005

2007

2009

2011

Source: ttp://www.econstats.com

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2013

Deficit

Government budget deficit is the amount by which some measure of government revenues falls short of some measure of government spending. Some Deficit above 2% is little recommendable as the WB says, but Ireland incurred in a one of the most dreadful deficits in modern Europe as a result of a banking sector bail-out. Consequently a big burden has to be progressively absorbed for at least 5 additional years, after the IMF had decided to intervene in 2010. Mexico on the other hand is pushing ahead very interesting deficit positions, an extra token of its economic health.

COUNTRY Ireland Mexico

2010 -31.97% -4.3%

2011 -10.32% -3.24%

2012 -8.59% -2.79%

2013 -6.81% -2.45%

2014 -4.42% -2.35%

Average -12.42% -3%

20 years evolution

10

5
0

1997

2007

1995

1999

2001

2003

2005

2009

2011

-5 -10 -15 -20 -25 -30

2013

ireland
mexico

-35
Source: ttp://www.econstats.com

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BALANCE OF PAYMENT External debt

Total external debt is debt owed to non-resident creditors and repayable in foreign currencies, goods or services by public and private entities in the country. It includes the sum of long-term and short-term debt, as well as the use of IMF credit. According to IMFs researches, the maximum external debt should not be higher than sixty per cent of the GDP. Borrowing money from abroad may be dangerous insomuch as you depend more on external issues. This ratio will be related with the current account deficit and foreign currency reserves, and will be necessary to analyse the risk country and its vulnerability. Current account deficit will be financed by non-residents loans and those lenders will be aware if the countrys economy is able to pay back their loans. Countries with high external debt are more vulnerable in the financial market. Due to the countrys difficulty to finance its imbalances, will be required higher interest rates and higher requirements to access the financial market. COUNTRY Ireland Mexico 2010 94.92% 22.46% 2011 109.27% 25.46% 2012 115.43% 43.64% 2013 118.3% 43.52% 2014 117.66% 43.43% Average 111.16% 43.28%

Source: http://www.rabobank.com/content/images/Mexico-201105_tcm43-105901.pdf

Mexicans external debt is expected to increase in the followings years to its limits, now that its GDP is, despite the crisis, growing at high rates, and will need to get into debt in order to continue its growth. Ireland, nevertheless, needs to reduce its external debt. Ireland has grown throughout the years thanks to the financial markets that were willing to lend money at low rates, but since the risk country assessment has gone up, none financial market is willing to lend money to Ireland. Current Account deficit

The balance of payments records the economys transactions with other economies. This balance records the current account as well as the capital and financial account. It is a doubleentry accounting system, which means that if any transaction is recorded as a debit, it will be another transaction recorded as a credit. Current account, at the same time, records transactions in goods and services (balance of trade), income and current transfers, whereas capital and financial account records capital inflows and outflows. 2012, International Economics course Page 7

The balance of trade is typically the most important part of the current account. When a country faces a current account deficit, it means that its economy is spending more than what they produce, and this extra expenses must be financed from savings or abroad through the capital and financial account. Up to now, many countries could afford to have great current account deficits by financing its imbalances in the financial market. Countries such as Spain or USA, where consumption is an important contributing factor in GDP growth, have had greater current account deficit than desirable (3% according to IMF). Current account factor may be harmful for the countrys economy insomuch as it must be financed in the international market. Due to the current situation, countries with high imbalances have to struggle to get financing. The two countries that we are analysing have shallow deficit or even surplus in the last year as well as in the forecast. Mexico, after the tequila crisis, is concern with its imbalances and is applying very good fundamental measures with the aim of not threatening its economic growth. Ireland, in the other way, went out of poverty twenty years ago thanks to relaxing taxes and motivating companies to set down in Ireland. Since then and until the houses bubble burst, the Irishs current account had been positive or near to zero. After have faced three years with high current deficit, Ireland is again having surplus in its current account balance, and it is expected that will maintain that path in the long run. COUNTRY Ireland Mexico 2010 0.49% -0.54% 2011 1.77% -0.95% 2012 1.89% -0.87% 2013 1.39% -0.85% 2014 1.89% -0.83% Average 1.49% -0.51%

http://www.rabobank.com/content/images/Ireland-201105_tcm43-128348.pdf; http://www.rabobank.com/content/images/Mexico-201105_tcm43-105901.pdf

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4 2 0

1999

2007

1995

1997

2001

2003

2005

2009

2011

2013

-2
-4 -6 -8

ireland mexico

Source: http://www.econstats.com/ International reserves:

International reserves ratio relates imports and the countrys foreign currency reserves. It measures how many months of imports can be paid with the countrys foreign currency reserves. A desirable level of international reserves would be that the total foreign reserves were enough to pay off the next six months of imports. This ratio is important to support and maintain confidence in the countrys currency. It provides a level of confidence to markets that the country can meet its external obligations. One of the problems in the tequila crisis was that the international reserves ratio of Mexico was under one month, whereas its external debt was very high. After the 90s, Mexico is also struggling to balance this ratio and to achieve the minimum desirable of six months. Irelands ratio is under a month, what is quite under the desirable level. Nevertheless, Irelands most trades are to Europe and considering that it is enrolled in the economic and monetary union, foreign currency reserves and international reserves ratio is not as important as in Mexico, or it can have less influence in the economy and its risk perception.

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COUNTRY Ireland Mexico

2010 0.09m 4.179m

2011 0.097m 3.962m

2012 0.094m 3.486m

2013 0.095m 3.724m

2014 0.095m 3.604m

Average 0.094m 3.79m

Source: http://data.worldbank.org/indicator/FI.RES.TOTL.MO

According to this ratio, Ireland, as well as Mexico, does not achieve the minimum ratio of six months. Markets risk perception is higher for Ireland, whereas Mexico is approaching the minimum required. The foreigners willingness to lend money or trade with this country will depend on this ratio.

7,0000 6,0000 5,0000 4,0000 3,0000 2,0000 ireland mexico

1,0000
0,0000 1995 1997 1999 2001 2003 2005 2007 2009 2011 2013
Page 10

Source: http://www.econstats.com/

Tequila crisis

The Tequila crisis is one of the most important events in emerging markets during the 90s. In 1994, when the crisis burst, almost of the ratios that we have seen until now threatened the Mexicans economy. The Mexicans economy was growing at a high path (6 to 7%), but this growth was dragging also huge imbalances. As the economy was experiencing such as huge GDP growth, the country needed also to improve its infrastructures. The government of Salinas as well as private firms issued bonds in dollar (tesobonds). The international reserves, however, could not pay back its short term debt, insomuch as the ratio was lower than a month.

2012, International Economics course

Moreover, there were elections in 1994, the current government was not willing to increase interest rates with the aim of reducing the monetary supply and relax the situation. There were also political issues such as the assassination of a presidential candidate or the hidden sterilization of reserve outflows by the central bank that made Mexicans risk increases. When the new government of Zedillo came into the power, they changed the fixed rate between dollar and peso to a free float exchange (the exchange rate went from 7 pesos to 4). At that time, the bank system and the exchange rates had collapsed, investors were tacking out the money from the country due to the distrust to Mexico. Finally, Zedillo borrowed money from the IMF.

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IMF REPORT IRELAND The Irish economy was slap by a drastic crisis in 2008, after around ten years of solid growth that drove the country to the fourth highest level of GDP per capita in the OECD. At first the main reason that explains this behaviour was increases in productivity. Nevertheless, as the same time as a period of low-cost funding on global markets and low risk repulsion, the development became more and more dependent on a speculative housing bubble financed by careless bank lending standards and extreme credit expansion that collapsed in 2008 at the same time of the global crisis. From 2008, the government has executed a considerable fiscal consolidation and now days this efforts are continuing, one of them the three-year adjustment programme with financial help from the IMF and EU. Currently the banking system has been recapitalized, but they are still requiring liquidity support from the Eurosystem. Good advances are being made to cut the fiscal deficit, but there is more to be done. Ireland is having a moderate recovery lead by gains in competitiveness and increases in exports, but it comes with significant downside risks related with market fears due to financial stability in the Euro Zone. On the other hand, to increase the possibilities of success, the government need to continue implementing the plan required to complete the imbalances, these include its business friendly environment, flexible labour markets and an expert labour force.

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SWOT MATRIX Strengths Ireland has become the second biggest high-technology exporter of Europe. Ireland has an open economy which is characterized by a high share of foreign direct investment and an external trade approximately equal to GNP. Sustainable economic growth will be dependent on the success of knowledge driven companies being able to access high skills and new technological developments.

Weaknesses A considerable disparity of the economic performance and structures of regions and the need to develop the innovation capacities of local enterprises. Ireland is vulnerable in the growth sectors of the knowledge economy as the R&D capability to underpin success in these sectors is not well developed in the public and private sectors. Economic activity has dropped sharply since the onset of the world financial crisis, with GDP falling by over 3% in 2008, nearly 8% in 2009, and 1% in 2010.

Opportunities The export sector, dominated by foreign multinationals, has become a key component of Irelands economy. Reforms to enhance competitiveness and support growth and job creation are moving forward. More conservative, provisioning and disclosure guidelines will enhance the transparency of the banks financial statements.

Threats Ireland achieved moderate growth in 2011 and cut the budget deficit to 10.1% of the GDP, although the recovery is expected to slow in 2012 as a result of the euro-zone debt crisis. Agriculture, once the most important sector, is now dwarfed by industry and services. Transhipment point for and consumer of hashish from North Africa to the UK and Netherlands and of European-produced synthetic drugs. Increasing consumption of South American cocaine. Minor transhipment point for heroin and cocaine destined for Western Europe.

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MEXICO After a deep recession related with a strong general downturn in the world economy, Mexico is experiencing a healthy recovery, with GDP growth of 5.5% in 2010 and 4.5% in 2011. Even though is expected that exports decrease the strong domestic demand should keep the recovery. Most of labour market indicators have improved; unemployment is the only one decreasing slowly. In the near term, given that inflation has come down, monetary policies can maintain the recovery by keeping rates low; but if the recovery not develop as it should, the government must fully implement its plans to decrease the budget deficit. The high oil prices and economic growth that the country has been shown and at the same time accumulate more financial assets during these periods would give the government more space to support the economy when dealing large shocks. Currently the biggest problems that the country is passing through are violence and corruption, which are a part of Mexican society, and on one level it exists to grease the wheels of progress.

SWOT MATRIX Strengths Mexico has the 13th largest nominal GDP and the 11th largest by purchasing power parity. Mexico is the twenty-third highest tourism spender in the world, and the highest in Latin America. It contains a mixture of modern and outmoded industry and agriculture, increasingly dominated by the private sector. Recent administrations have expanded competition in seaports, railroads, telecommunications, electricity generation, natural gas distribution, and airports.

Weaknesses Downside risks to Mexicos near-term outlook arise from unsettled global growth prospects and the turbulence in international financial markets. 83% of exports depend on USA. Poor levels of public education system, infrastructure, labour laws and develop of the private investment in the energy sector.

Opportunities Mexico continues to meet the qualification criteria for access to Flexible Credit Line (FLC) resources.

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Mexico has free trade agreements with over 50 countries including, Guatemala, Honduras, El Salvador, the European Free Trade Area, and Japan, putting more than 90% of trade under free trade agreements. High prices in oil markets.

Threats Structural inefficiencies that have existed for decades continue that limit improvements in productivity and living standards for many citizens. The weak economic in the US. Monopolies impede healthy competition. Corruption and violence. US have intensified security measures to monitor and control legal and illegal personnel, transport, and commodities across its border with Mexico.

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CONCLUSION

ITEM MACRO

AV

ASSETSSMENT

AV

ASSETSSMENT

GDP 1.21% Inflation 1.48% Unemplyment 12.5% Fiscal Deficit 12.42% BALANCE PAYMENT OF

4.06% 3.33% 4.1% 3%

External Debt 116.16% Current Account 1.49% Deficit International 0.0904 m Reserves ASSESSTMENT COUNTRY REPORT MEDIUM RISK

43.28% -0.51%

3.79 m

ASSESSTMENT LOW RISK

After some discussion, we assign a medium risk assessment to Mexico and Ireland as places to invest for well disparate reasons: In the case of Ireland, some blundering decisions drove the macroeconomics of the country from of the biggest success stories of western economy to epitomize the worst aftermath of housing and banking crisis worldwide. A purge in public sector is in progress, in order to reabsorb the huge expenditure made guarantying 100% of deposits in the banking sector bail-out of 2009. But we still rely in Irish economy insofar very meriting foundations were establish in the economy (excellent, friendly business environment, an outstanding degree of freedom in the economy, investment in education an r&d). Once the bad path be overcome, in a few years, we have reasons to think Irish Economy will do well.

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Mexico remains as an unchallenged potential country to lead world economy (or at least to place itself among leading countries), an good homework has been made during crisis years; so vouch its economic data. But there are some changes required to become certainly a non-risky country for investment in terms of corruption, legal security, a economic liberalization. Anyway, it seems to be one of the prime destinations for capital flows in further years.

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SOURCES Dr. Michael Braun. Country Profile: Ireland. Available:

http://ec.europa.eu/investinresearch/pdf/download_en/psi_countryprofile_ireland.pdf

Access date: 04-06/03/12. CIA The World Factbook. Last: 01/03/12. Europe: Ireland. Available: https://www.cia.gov/library/publications/the-world-factbook/geos/ei.html Access date: 04-06/03/12. International Monetary Fund. Last: 19/01/12. Statement by the EC, ECB, and IMF on the Review Mission to Ireland. Available: http://www.imf.org/external/np/sec/pr/2012/pr1215.htm Access date: 04-06/03/12. OECD. Economic Survey of Ireland 2011. Available: http://www.oecd.org/document/63/0,3746,en_33873108_33873500_48842623_1_1_ 1_1,00.html Access date: 04-06/03/12. Mexico Data Info. Last: 21/05/07. World Bank Diagnoses Mexican Economic Problems. Available: http://mexidata.info/id1371.html Access date: 04-06/03/12. CIA The World Factbook. Last: 21/02/12. North America: Mexico. Available: https://www.cia.gov/library/publications/the-world-factbook/geos/mx.html Access date: 04-06/03/12. International Monetary Fund. Last: 22/12/11. IMF Executive Board Completes Review of Mexicos Performance Under the Flexible Credit Line. Available: http://www.imf.org/external/np/sec/pr/2011/pr11480.htm Access date: 04-06/03/12. OECD. Economic Survey of Mexico 2011. Available: http://www.oecd.org/document/34/0,3746,en_33873108_33873610_47781730_1_1_ 1_1,00.html Access date: 04-06/03/12. Lessons from the tequila crisis for successful financial liberalization. Available: http://www.aei.org/article/foreign-and-defense-policy/regional/latin-america/lessonsfrom-the-tequila-crisis-for-successful-financial-liberalization/ Access date: 04-06/03/12. World economic outlook. Ireland data. Available: http://www.econstats.com/weo/CIRL.htm Access date: 04-06/12. World economic outlook. Mexican data. Available: http://www.econstats.com/weo/CMEX.htm Access date: 04-06/03/12. World development indicators. 2011. World Bank publications. Mexican Country Report. Rabobank. Available: http://www.rabobank.com/content/images/Mexico-201105_tcm43-105901.pdf

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Access date: 04-06/03/12 Irish Country Report. Rabobank. Available: http://www.rabobank.com/content/images/Ireland-201105_tcm43-128348.pdf Access date: 04-06/03/12 The World Bank data. http://data.worldbank.org/indicator/FI.RES.TOTL.MO Access date: 04-06/03/12

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