Country Risk Analysis

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Country Risk Analysis

• Chapter 6

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THE MEASUREMENT OF POLITICAL RISK

• I. MEASURING POLITICAL RISK
• Two Perspectives
• A. Country-specific
• B. Industry-specific

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THE MEASUREMENT OF POLITICAL RISK

• C. Political Stability
• 1. Measured by
• a. Frequency of government changes
• b. Level of violence
• c. Number of armed insurrections
• d. Conflict with other states

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THE MEASUREMENT OF POLITICAL RISK

• D. Economic Factors
• 1. Indicators of political unrest
• a. Rampant inflation
• b. Extreme balance of payment deficits
• c. Slowed growth of per capita GDP

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THE MEASUREMENT OF POLITICAL RISK

• E. Subjective Factors
• 1. Profit Opportunity Recommendation
• 2. Political Risk and Uncertain Property
  Rights

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THE MEASUREMENT OF POLITICAL RISK

• 3. Capital Flight
• a. Definition
• the export of savings by a nations
  citizens because of safety-of-capital
  fears.
• b. Measurement use the balance-of- payment
  account

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THE MEASUREMENT OF POLITICAL RISK

• c. Causes of capital flight
• 1.) Inappropriate economic policies
• 2.) Expectation of devaluation
• 3.) High political risk

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THE MEASUREMENT OF POLITICAL RISK

• Primary focus How well is the country doing
  economically?

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II. ECONOMIC AND POLITICAL FACTORS

• A. Fiscal Responsibility
• -high government deficits

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Economic and Political Factors

• B. Monetary Stability
• ?MS gt ?MD
• C. Freely-floating versus Controlled Exchange
  System
• - currency usually overvalued when
  currency is pegged.

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Economic and Political Factors

• D. Government Spending
• - Wasteful inability to service foreign
  debt
• E. Resource Base
• -lack of strong work ethic

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ECONOMIC AND POLITICAL FACTORS

• F. Country Risk and Adjustment to External
  Shocks
• 1. What are the impacts of external shocks?
• - how well a nation responds varies

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III. Key Indicators of Country Risk

• 1. Relative size of government debt
• 2. Rate of money supply expansion
• 3. Existence of government- imposed barriers
  to market forces

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Key Indicators of Country Risk

• 4. Level of tax rates
• 5. Amount of government-owned firms
• 6. Political and fiscal responsibility
• 7. Amount and extent of corruption

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IV. Key indicators of economic health

• 1. Structural incentives
• 2. Legal structure
• 3. Clear incentives to save
• 4. Open economy (globally)
• 5. Stable macroeconomic policies