COUNTRY RISK ANALYSIS

BY GROUP 5

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Country analysis involves the examination and interpretation of a nation¶s economic, social and political environment. The analysis offers a comprehensive overview of a country.

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To explain the techniques used to measure country risk; and To explain how MNCs use the assessment of country risk when making financial decisions.

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Country analysis is useful for: Investors in the financial market Companies intending to set up a subsidiary Companies wishing to enter a new market People wishing to reside in the country

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Country risk analysis can be used: To monitor countries where the MNC is currently doing business. As a screening device to avoid conducting business in countries with excessive risk. To revise its investment or financing decisions in light of recent events.

FACTORS

ECONOMIC RISK

FACTORS

TRANSFER RISK

EXCHANGE RATE RISK

LOCATION RISK

FACTORS

SOVEREIGN RISK

POLITICAL RISK

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A macro-assessment of country risk is an overall risk assessment of a country without considering the MNC¶s business. A micro-assessment of country risk is the risk assessment of a country with respect to the MNC¶s type of business.

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As a result of the crisis that culminated in the Gulf War in 1991, many MNCs reassessed their exposure to country risk and revised their operations accordingly.

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The 1997±98 Asian crisis caused MNCs to realize that they had underestimated the potential financial problems that could occur in the highgrowth Asian countries.

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Following the September 11, 2001 attack on the United States, some MNCs reduced their exposure to country risk by downsizing or discontinuing their business in countries where U.S. firms may be subject to more terrorist attacks.

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The Checklist approach involves rating and weighting all the macro and micro political and financial factors to derive an overall assessment of country risk. The Delphi technique involves collecting various independent opinions and then averaging and measuring the dispersion of those opinions.

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Quantitative analysis techniques like regression analysis can be applied to historical data to assess the sensitivity of the business to various risk factors. Inspection visits involve traveling to a country and meeting with government officials, firm executives, and consumers to clarify uncertainties.

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Standard & Poors and Moodyµs are the two largest rating agencies. Other agencies: Duff & Phelps, Fitch, Political Risk Services, Beri « S&P concentrates on 8 categories to come up with their ratings Each of this categories is related to the two major sources of risk: economic and political risk
FIn 763: Lecture 2 15

INDIA RANK 12TH IN THE GROWING ECONOMY

GDP GROWTH

FDI & FPI

DOING BUSINESS RANK ( 181 COUNTRIES) EASE OF DOING BUSINESS STARTING A BUSINES DEALING WITH CONSTRUCTION PERMITS EMPLOYING WORKERS REGISTERING PROPERTY GETTING CREDIT PROTECTING INVESTORS PAYING TAXES TRADING ACROSS BORDER ENFORCING CONTRACTS CLOSING A BUSINESS 2009 122 121 136 89 105 28 38 169 90 180 140 2008 126 126 131 89 114 25 33 167 81 180 140

CHANGE

4 -7 -5 NO CHANGE -9 -3 -5 -2 -9 NO CHANGE NO CHANGE

Overall country risk ratings Current month India Bangladesh Pakistan Sri Lanka BBB B B BB Previous month BBB B B BB 12 months ago -

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Economic Risk is the significant change in the economic structure or growth rate that produces a major change in the expected return of an investment. Arises from the changes in fundamental economic policy goals

Economic structure risk ratings Current month India Bangladesh Pakistan Sri Lanka BBB CCC BB B Previous month BBB CCC BB B 12 months ago -

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Transfer Risk is the risk arising from a decision by a foreign government to restrict capital movements. Restrictions could make it difficult to repatriate profits, dividends, or capital. It usually is analyzed as a function of a country's ability to earn foreign currency, with the implication that difficulty earning foreign currency increases the probability that some form of capital controls can emerge.

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Exchange Risk is an unexpected adverse movement in the exchange rate. Exchange risk includes an unexpected change in currency regime such as a change from a fixed to a floating exchange rate. A country's exchange rate policy may help isolate exchange risk. Managed floats, where the government attempts to control the currency in a narrow trading range, tend to possess higher risk than fixed or currency board systems. Floating exchange rate systems generally sustain the lowest risk of producing an unexpected adverse exchange movement. The degree of over- or under-valuation of a currency also can help isolate exchange rate risk.

Currency risk ratings Previous Current month month India Bangladesh Pakistan Sri Lanka BBB BB B BB
BACK

12 months ago -

BBB BB B BB

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Location or Neighbourhood Risk includes spillover effects caused by problems in a region, in a country's trading partner, or in countries with similar perceived characteristics. Geographic position provides the simplest measure of location risk. Trading partners, international trading alliances, size, borders, and distance from economically or politically important countries or regions can also help define location risk

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Sovereign Risk concerns whether a government will be unwilling or unable to meet its loan obligations, or is likely to renege on loans it guarantees. Sovereign risk can relate to transfer risk in that a government may run out of foreign exchange due to unfavorable developments in its balance of payments

Sovereign risk ratings Previous month

Current month

12 months ago

India

BBB

BBB

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Bangladesh

CCC

CCC

-

Pakistan

B

B

-

Sri Lanka

B

B

-

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Political Risk concerns risk of a change in political institutions stemming from a change in government control, social fabric, or other non-economic factor. This category covers the potential for internal and external conflicts, expropriation risk and traditional political analysis.

Political risk ratings Previous Current month month 12 months ago India Bangladesh Pakistan Sri Lanka BB CCC CC B BB CC CC B -

Year 2003 2004 2005 2006 2007 2008 2009 2010

Inflation rate (consumer prices) 5.40% 3.80% 4.20% 4.20% 5.30% 6.40% 8.30% 10.70%

PERCENTAGE OF PEOPLE WHO HAVE GIVEN BRIDE IN LAST 12 MONTH

COUNTRY

PERCENTAGE

INDIA PAKISTAN SRI LANKA BANGLADESH

7-12% 13-22% 7-12% 13-22%

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