Multinational Financial Management Alan Shapiro9th Edition
J.Wiley & Sons
Power Points byJoseph F. Greco, Ph.D.California State
University, Fullerton1Country Risk AnalysisCHAPTER 6THE MEASUREMENT
OF POLITICAL RISKI.MEASURING POLITICAL RISKA.Country-specific
perspectivefocuses on the country from a top-down view, i.e.
macroeconomic variables to industry-specific analysis3THE
MEASUREMENT OF POLITICAL RISKB.Political Stability 1. Measured
by:a.Frequency of government changesb.Level of violencec.Number of
armed insurrectionsd.Conflict with other states4THE MEASUREMENT OF
POLITICAL RISKC.Economic Factors1.Indicators of political
unresta.Rampant inflationb.Balance of payment deficitsc.Slowed
growth of per capita GDP5THE MEASUREMENT OF POLITICAL
RISKD.Subjective Factors1.Profit Opportunity 2.Political Risk and
Uncertain Property Rights6THE MEASUREMENT OF POLITICAL
RISK3.Capital Flighta.Definition:the export of savings by a nations
citizens because of safety-of-capital fears.b.Measurement: use the
balance-of- payment account7THE MEASUREMENT OF POLITICAL
RISKc.Causes of capital flight1.)Inappropriate economic
policies2.)Expectation of devaluation3.)High political
risk8ECONOMIC AND POLITICAL FACTORSI.Economic and Political
FactorsPrimary focus: How well is the country doing
economically?Negative factors:A. Fiscal Irresponsibility-high
government deficitsB. Monetary InstabilityC. Controlled Exchange
Rate System-currency usually overvaluedD. Wasteful Government
Spending-inability to service foreign debt9ECONOMIC AND POLITICAL
FACTORSI. Economic and Political Factors (cont)E.Resource Base-lack
of strong work ethicF.Country Risk and Adjustment to External
Shocks1.What are the impacts of external shocks:how well a nation
responds varies10ECONOMIC AND POLITICAL FACTORSII. Key Indicators
of Country RiskA.Relative size of government debtB.Money
expansionC.Existence of government-imposed barriers to market
forces11ECONOMIC AND POLITICAL FACTORSII. Key Indicators of Country
Risk (cont)D.Level of tax ratesE.Amount of government-owned
firmsF.Political and fiscal responsibilityG.Amount and extent of
corruption12ECONOMIC AND POLITICAL FACTORSIII. Key indicators of
economic healthA. Structural incentivesB.Legal structureC.Clear
incentives to saveD.Open economyE.Stable macroeconomic
policies13COUNTRY RISK ANALYSIS IN INTERNATIONAL BANKINGI. Country
Risk and the Terms of TradeWhat ultimately determines a nations
ability to repay foreign loans?- the speed of adjustment14COUNTRY
RISK ANALYSIS IN INTERNATIONAL BANKINGII. The Governments
Cost/Benefit Calculusdebt to wealth ratiocost of
defaultfluctuations in the terms of trade15COUNTRY RISK ANALYSIS IN
INTERNATIONAL BANKINGIII. Lessons from the International Debt
Crisis of 1982Economic reforms that work:A. Strong head of stateB.
Viable economic planC. Competent economic teamD. Support at the
topE. Sell the program to all levels of society16
