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Country Risk Analysis
Definition
Country Risk Analysis is assessment of potential risks and rewards from doing business in country
Country risk represents potentially adverse impact of a country’s environment on the cash flow of the firm
Risk perception
Sovereign risk applies specifically to the creditworthiness of governments as borrowers
Political risk refers to political factors that might impair a borrower’s ability to pay
Importance
Used to monitor countries where the firm is presently engaged in international business
Used by the firm as a screening device to avoid countries with excessive risk
Used to assess particular forms of risk for a proposed project considered for a foreign country
Awareness of Country Risk
Crisis in Mexico 1982 Crisis in China in 1989 1997 East Asian Currency crisis Crisis in Iraq Crisis in Iran, Afghanistan Recent sub-prime crisis starting in USA
Factors
Political
Economic Condition
s
Subjective
Financial
04/08/2023Country Risk Analysis 6
Political Risk Factors
Attitude of host government War Currency inconvertibility Bureaucracy Blockage of fund transfers Corruption
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Financial Risk Factors
Current and potential state of the country’s economy
Financial distress Additional host government restrictions Moratorium on fund transfer Interest rates, exchange rates and
inflation
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Economic Conditions
Diversification of the economy Degree of reliance on a few key exports
and the effects of a decline in the worldwide prices of those exports
Exchange rate devaluation Frequency of government intervention
in the money market and the ceilings of interest rates
Possibility of recession04/08/2023Country Risk Analysis 9
Subjective factors
Country’s attitude towards private enterprise
Risk of currency devaluation Risk of government`s income reduction External flows dependence, Productivity restrictions Social pressures Attitude of consumers in the host
country04/08/2023Country Risk Analysis 10
Types of Country Risk Assessment
Macro-assessment of country risk
Country characteristics that affect profits
Micro-assessment of country risk
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Use of country risk assessment
Incorporating country risk in capital budgeting
Adjustment of the discount rate
Adjustment of the estimated cash flows
Application of country risk analysis
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Indicators of high country risk
Large government deficit relative to GNP High rate of money expansion Substantial government spending yielding low rate of
return High taxes Vast state-owned firms Attitude that government’s role is to maintain living
standards Pervasive corruption Absence of basic government institutions almost all are common for the developing countries!!!!!!
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Measurement of Country Risk
One way to measure Country Risk is checklist approach, and it involves: Assigning values and weights to political and financial
risk factors, Multiplying the factor values with their weights, and
summing up to give the political and financial risk ratings,
Assigning weights to the risk ratings, and Multiplying the ratings with their weights, and summing
up to give the country risk rating
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Country Risk Measurement
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Derivation of Country Risk
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Comparing Risk Ratings An MNC may evaluate country risk for several
countries, perhaps to determine where to establish a subsidiary
Foreign investment risk matrix (FIRM) FIRM is used to develop a matrix that categorizes
countries based on political risk and economic risk as Acceptable Unacceptable Uncertain for investment
The importance of political risk versus economic risk varies with the intent of the MNC
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FIRM2 dimensional mapping of Political risk component Economic risk component
How an MNC analyses risk Stage1 – Use FIRM - to eliminate risky countries Stage2 – Country risk profile Stage3 – Investment Risk analysis Stage4 – Foreign investment risk Audit
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World Threat Perception - Terrorism
Terrorism has added a new dimension in the country risk assessment
Middle East› Iraq › Iran – nuclear ambition, internal consternation› Israel – Hamas-Israeli cycle of violence
Asia› Afghanistan – warlords back in the game, on their own side› Indonesia – Jemmah Islamia, Al-Qaeda’s kissing cousin› Philippines – domestic terrorists
04/08/2023Country Risk Analysis 19
Global Terrorism Index The Index is designed to assess the risk of terrorism in
each country, or against that country’s interests abroad, over the next 12 months
It does this by qualitatively rating five key factors for each country – Motivation, Presence, Scale, Efficacy and Prevention – and then giving each of these a quantitative weighting in order to determine its overall Terrorism Risk
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Summary
Potential risk & rewards of doing business in a country
Factors› Political› Financial› Economic
Risk Assessment Measurement & comparison of country risk Terrorism
04/08/2023Country Risk Analysis 22
THANK YOU
Country Risk Analysis