Course: FIN444

Course Name: International Financial Management

Section 05
Assignment- 2 Country Risk Analysis
Prepared for
Dr. Tanvir Nabi Khan.
Assistant Professor, Department of Accounting & Finance.
North South University
Prepared by
Group 4 | FIN444 | Section 05

Walid Zubaer 1511644030

Kazi Rejwanul Islam Rifat 1712046030
Dipta Sarkar 1821069030
Syed Ashik E Khoda 1831414630
Sanjida Alam Jui 1921137030
Fahima Khan Nourin 1922133630
 Country Risk Analysis
Introduction: 
Country risk analysis identifies discrepancies that increase the risk between two countries'
investment and evaluates possible risk and returns from cross border investments. It is used to
assess the potential risk of multinational corporations and the activities that can be done to
reduce or eliminate that risk. It also refers to foreign economic, social, and political factors that
might adversely impact a multinational corporation's cash flows. It is used to assess the potential
risk of multinational corporations and the activities that can be done to reduce or eliminate that
risk. Moreover, the analysis can be used as a screening device to avoid conducting business in
countries with excessive risk and make effective long term investment or financing
decisions. Country risk analysis is not always accurate as there is a tendency for mistakes like
giving incorrect ratings to factors and inappropriately weighing the relevance of the factors.
Continuous risk monitoring is necessary because, if it rises to an unacceptable level, the MNC
should divest itself of its subsidiaries there. Analyzing country risk is important for capital
budgeting. However, if the country's risk is too high, it is bad for the workers and there is no
reasonable expectation of a return to finance the project.  In order to lower country risk, MNCs
should have a short-term view, work with local partners, borrow money from local funds, buy
insurance, and form joint ventures.

Country Risk Characteristics

Political risk and financial risk are the two categories of country risk characteristics. Any U.S.
investor who wants to make investments in Bangladesh will be exposed to these two categories
of risk.
Political risk:
Several military takeovers have occurred in the nation since the 1971 Bangladesh Liberation
War. Despite hostilities between the Bangladesh Nationalist Party (BNP) and the ruling Awami
League (AL), the latter does little to expand its representation in parliament. The absence of a
strong opposition could cause the government to become complacent in its decision-making. The
AL will continue to be at risk of societal discontent but has a strong majority in the parliament,
as claims of fraud loom over the group. These dangers, together with significant degrees of
corruption, exacerbate Bangladesh's unfavorable economic environment.
Despite the political climate being concerning, particularly in the long run, relative stability,
along with a prudent macroeconomic strategy and a generally hands-off approach by the
government to the private sector, have helped to sustain the economy's impressive rate of
development. The nominal GDP is $325 billion, while the GDP per person in 2020 was $2010,
which is higher than India's. In the ten years up to 2019, GDP grew by more than 6%. Prior to
Covid, growth was 8% last year (higher than India and China). Bangladesh would move from 42
to 26 in the GDP rankings by 2030, according to HSBC's 2018 assessment.
Financial Risk:
Bangladesh has a middle class of about 35 million people and is a young nation (40% of the
population is under 26). About 165 million people live there, making it the sixth most populous
nation in the world. Domestic demand, remittances, and exports of RMGs are the main forces
behind the economy. We predict that these factors will continue to promote economic growth
throughout the short and medium terms. Bangladesh will need to find alternative ways to
encourage investment when it leaves the Least Developed Country category in 2026 and loses
access to preferential funding and tariff reductions, such as more FDI and export diversification.
Ease of Doing Business is still a challenge and remains essential to attracting greater FDI.
According to the World Bank's Doing Business Report, Bangladesh ranked 168 out of 190.
(2019). A political and corporate nexus brings together influential parties that have a lot of clout
behind the scenes. The numerous politically related non-performing loans in the poorly regulated
banking industry, which pose a risk to financial stability, are one of the most memorable
examples.
Due to a careful approach to currency management, the capital market is small and its growth is
constrained. High import taxes and the arbitrary application of rules shield well-established
companies, limiting competition and the nation's economic potential. When making investment
selections, the often-low standard of financial reporting should not be taken into consideration.

Major 2019 2020 2021 2022

indicator
GDP (billions 350.75 373.90 416.27 460.75
USD)
GDP growth 8.15 3.51 4.6 6.5
(%)
Inflation Rate 5.6 5.6 6.2 6.8
(%)
General 34.2 35.5 37.5 37.2
Government
Gross Debt
Measuring Country Risk
Depending on the company, industry, and project in consideration, a different country risk
assessment may be necessary to determine a country's capacity to transfer funds for foreign
transactions. Risk assessment for a country can be done in two different ways.

Macro-assessment country risk: 

A macro assessment of country risk is a comprehensive analysis of a country that considers all
the possible variables that affect country risk except those that affect any specific company or
multinational corporations. This assessment eliminates essential information that might increase
the accuracy of the assessment. This assessment process generally correlates political instability,
social unrest, and economic volatility with country risk.
 
Micro- assessment country risk:
Micro risk assessment refers to analyzing a variety of national factors which relate to the
multinational corporation’s type of business. It defines the country's risk relationship to the
particular MNC. Factors that the government may or may not be able to control can result in
micro risk. Due to these micro risks factors, corporations may find it difficult to generate revenue
outside of their home countries. The goal is to identify the industry's or company's vulnerability
to specific macro environmental conditions.

Techniques for Assessing Country Risk

There are several methods to construct a system for analyzing these factors and determining a
country risk rating after identifying and considering all the macro- and micro-factors in the
country risk assessment. These methods are-
 Checklist approach 
In this method, every political and financial factor (macro and micro) that affects how a
corporation assesses country risk must be evaluated. In order to provide an overall
assessment, it also implies rating and weighing each of the factors that have been
 identified. Greater weights should be given to those variables considered to have a
stronger impact on country risk.
 Delphi technique
Using the Delphi method, independent opinions are collected without group discussion,
averaged, and their degree of dispersion is then measured. MNC gathers feedback and
makes an effort to establish a common view regarding the perceived risk of the country
by surveying certain workers and outside consultants who have experience evaluating the
risk characteristics of a given country. The survey summary is then sent back to the
respondents and asked for more feedback.
 Quantitative analysis
Regression analysis is a tool used in quantitative analytic approaches to evaluate risk and
can be historically applied to determine how sensitive a company is to different risk
factors. Over a number of prior months and quarters, a firm could regress a measure of its
business activity against nation traits. A business's vulnerability to a nation's economy
will be shown by the findings of such analysis.
 Inspection visits
Traveling abroad to interact with consumers, corporate executives, or government
representatives is required for inspection visits. Even though some factors could be
challenging to analyze without traveling to the host country, such visits can help firms
clarify any unclear opinions they may have about a country.
 Combination of techniques 
Many MNCs lack a defined method to evaluate country risk. In that situation, MNCs
evaluate country risk using a combination of these methods.
Managing Country Risk
The most serious country risk is a host government takeover, which can undermine some of the
potential benefits of DFI. Particularly when the MNC lacks the ability to negotiate with the host
government, this form of takeover could result in significant losses.

In order to reduce the risk of host government takeover, firms often-

Use a Short-Term Horizon

Money that needs to be obtained quickly falls under the category of a short-term time horizon.
An MNC might focus on restoring cash flow quickly to cut down on losses in case of
expropriation and make the least effort to replace the subsidiary's machinery and equipment. By
selling off its assets to local investors or the government, an MNC may gradually reduce its
overseas investment. Therefore, a host government would not be highly motivated to take over
an MNC's subsidiary.

Rely on Unique Supplies or Technology

The possibility of the host government taking over the subsidiary will be lowered if it can
conceal the technology in its manufacturing process and import supplies from its headquarters
that cannot be produced locally. It will also be impossible for the host government to run the
subsidiary without those supplies.

Hire Local Labor 

The effectiveness of this approach in avoiding a takeover is quite moderate. According to this
strategy, if local subsidiary employees are adversely affected by the host government takeover,
they can put pressure on the government to prevent it.

Borrow Local Funds

Local banks will be cautious about the subsidiary's future performance if it borrows locally.
Banks would try to stop a takeover by the host government if it would reduce the chances to get
their loan repayments on time. However, the effectiveness of this strategy is constrained because
the host government might guarantee payments to the banks.
Incorporating Risk in Capital Budgeting
If MNCs or an investor trying to find out the probability of an invested project. They can
measure country risk following three types of method. Every method discusses in below:
Adjustment of the Discount Rate
A recommended project's discount rate is meant to represent the required rate of return on
that project. As a result, the discount rate can be changed to take the country risk into
account. This strategy is practical in because Country risk can be captured by adjusting
the capital budgeting analysis. Due to the adjustment's arbitrary nature, it's possible that
feasible initiatives will be rejected while infeasible projects will be approved.
Adjustment for the Estimated Cash flow:
Estimating how the cash flows would be impacted by each kind of country risk may be
the most appropriate approach for including it in a capital budgeting analysis. For
instance, the MNC should take measures if there is a 30% chance that the host
government will temporarily prohibit funds from the subsidiary to the company.
Calculate the project's net present value (NPV), keeping in mind that there is a 30%
possibility that this NPV will materialize
The MNC can determine the probability distribution of NPVs for the project by
examining each potential effect. It will base its decision to accept or reject the project on
its evaluation of the likelihood that it will produce a positive NPV as well as the size of
potential NPV outcomes.
Analysis of existing project:
A MNC should analyze the country risk on a regular basis once a project has been
executed in addition to taking it into account when evaluating new projects. An MNC
may need to reconsider the profitability of maintaining this company if it has one in a
nation with unfavorable political conditions.

Conclusion: Country Risk Analysis is practical concept that can measure an investor
or a MNC company how they can invest on the project in short term or long term. Some
risk factor they could face. When an investor used risk characteristics, they can measure
financial risk are the country’s gross domestic product, interest rate, exchange rate and
inflations rate. MNCs measure the country risk ,they can use some technique like
checklist approach, quantitate analysis and inspection If an US investor would invest in
Bangladesh, these individuals can face some financial risk. But US investor cannot deal
with a huge complication in invest in Bangladesh rather than the other country like
Pakistan, Japan, China. Those countries have many government barriers and fixed
exchange rate and also high inflation rate. According to assessment of country risk of
Bangladesh has some profitable sector for invest. Investor cannot disappoint to invest in
Bangladesh