Country Risk Analysis

Nikhil D. Adhav MBA 2nd Year

What is Country Risk?

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. This risk includes

Political risk
Exchange rate risk Economic risk Sovereign risk Transfer risk etc.

Country risk
This risk varies from one country to another. Some countries

have high enough risk to discourage much foreign

investment. Risk of capital being locked up.

Can reduce expected rate of returns and must be taken

under consideration when investing abroad. Country risk is higher with longer term investments and direct investments, which are investments not made through a regulated market or exchange.

Sources of country risk

Macro Risk
Affects all firms in the host country.

Micro Risk
Specific to an industry, firm or project in a country.

Country Risk Ratings

Rank 1 2 3 4 5 6 7 8 Country Indonesia Greece Malaysia Russia Ireland Argentina Thailand South Korea Pre-crisis score 73.2 82.7 84.5 50.7 92.4 53.8 82.1 85.0 Score out of 100 Sept 2011 score 58.2 40.6 66.6 56.9 60.8 43.7 61.7 73.3

9
10

Portugal
Spain

83.0
86.6

55.9
66.0

Source: Euromoney Country risk September 2011

Reliable rating agencies

International Monetary Fund

The World Bank

Standard`s & Poor`s Moody`s Economist Intelligence Unit Political Risk Services Business Environmental Risk Intelligence Control Risks information services

International banks and other institutions

Strategies for managing the country risk

1. Negotiate the environment with host country

The investment environment o Taxes o Labor issues o Concessions o Obligations and restrictions

o International arbitration of disputes

The financial environment o Cash flow remittance o Access to capital market o Subsidize financing o Corporate governance environment.

2. Structure foreign operations to minimize country risk while maximizing returns

Limit the scope of technology transfer to foreign affiliates to include only non- essential parts of the production process. Limit dependence on the single partner. Enlist local partners. Use more stringent investment criterion.

Plan for disaster recovery.

3. Obtain political risk insurance

Insurable risk`s are

Loss is identifiable in time, place, cause and amount. A large number of individuals or business are exposed to risks. The expected loss over the life of contract is estimable, so that reasonable premiums can be set by the insurer. Loss is outside the influence of the insured.