Country Risk Analysis PPT SecD Group10 | Risk Management | Risk

Country Risk Analysis

 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 risk refers to political factors that might impair a borrower’s ability to pay

  Political


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

Country Risk Analysis 12/22/09


Political Risk Factors
 Attitude  War  Currency

of host government

inconvertibility  Bureaucracy  Blockage of fund transfers  Corruption
  
Country Risk Analysis 12/22/09


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
Country Risk Analysis 12/22/09


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 recession
Country Risk Analysis 12/22/09


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 country
Country Risk Analysis 12/22/09


Types of Country Risk Assessment
 Macro-assessment of country risk   Country characteristics that affect profits   Micro-assessment of country risk

Country Risk Analysis 12/22/09


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


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!!!!!!

Country Risk Analysis 12/22/09


Measurement of Country Risk

One way to measure Country Risk is checklist approach, and it involves: v Assigning values and weights to political and financial risk factors, v Multiplying the factor values with their weights, and summing up to give the political and financial risk ratings, v Assigning weights to the risk ratings, and v Multiplying the ratings with their weights, and summing up to give the country risk rating

Country Risk Analysis 12/22/09


Country Risk Measurement

Country Risk Analysis 12/22/09


Derivation of Country Risk

Country Risk Analysis 12/22/09


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
v Acceptable v Unacceptable v Uncertain for investment

The importance of political risk versus economic risk varies with the intent of the MNC

Country Risk Analysis 12/22/09



2 dimensional mapping of  Political risk component  Economic risk component

How an MNC analyses risk
Stage1 Stage2 Stage3 Stage4 – – – – Use FIRM - to eliminate risky countries Country risk profile Investment Risk analysis Foreign investment risk Audit

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Country Risk Analysis 12/22/09


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

› Afghanistan – warlords back in the game, on their own

side › Indonesia – Jemmah Islamia, Al-Qaeda’s kissing cousin › Philippines – domestic terrorists

Country Risk Analysis 12/22/09


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


Country Risk Analysis 12/22/09


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  

Potential risk & rewards of doing business in a country Factors › Political › Financial › Economic Risk Assessment Measurement & comparison of country risk Terrorism

Country Risk Analysis 12/22/09



Country Risk Analysis

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