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COUNTRY RISK

ANALYSIS
Presented by Group 6 :
• Fika Zuarti
• Elga Devita
• M. Rafli Imron
• Romi Hidayat
• Rony Yandra
Learning Objective
1. To define what country risk means from the standpoint
of an MNC
2. To describe the social, cultural, political, and economic
factors that affect the general level of risk in a country
and identify key indicators of country risk and economic
health
3. To describe what we can learn about economic
development from the contrasting experiences of a
variety of countries
4. To describe the economic and political factors that
determine a country’s ability and willingness to repay its
foreign debt
PART I. THE MEASUREMENT OF
POLITICAL RISK

I. MEASURING POLITICAL RISK


Political Stability
1. Measured by:
a. Frequency of government
changes
b. Level of violence
c. Number of armed
insurrections
d. Conflict with other states
THE MEASUREMENT OF POLITICAL
RISK
Economic Factors
1. Indicators of political
unrest
a. Rampant inflation
b. Balance of payment
deficits
c. Slowed growth of per
capita GDP
THE MEASUREMENT OF POLITICAL
RISK

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

From Economic Standpoint :

Political Risk Refers To Property Rights


Profit Opportunity
Recommendation
(POR) rating :

Index that tries to


incorporate all these
economic, social, and
political factors into
an overall measure of
the business climate,
including the political
environment

The scores of countries listed on the POR scale


are based on an aggregation of the subjective
assessments of a panel of experts
Political Risk and Uncertain Property Rights

Example
Property Rights in China

Mc. Donand Vs Beijing Govt


reasons why property rights protection in China is low :
1. China’s communist past
2. China’s Constitution was written by the Chinese Communist
Party
3. Constitution does not give citizens rights to enter into
business or protect the property rights of citizens from state
appropriation.
THE MEASUREMENT OF POLITICAL
RISK
3. Capital Flight
Capital flight is the movement of capital from
one country to another, or sometimes from
one investment sector to another,
to capitalize on returns or mitigate risk

Measurement : use the balance-of- payment


account
capital flight is difficult to measure accurately because
it
is not directly observed in most cases. Nevertheless,
one can usually infer the capital outflows, using
balance-of-payments figures—particularly the entry
labeled ‘‘errors and omissions.’’

The World Bank methodology estimates capital flight


as ‘‘the sum of gross capital inflows and the current
account deficit, less increases in foreign reserves.’’5
These estimates indicate that capital flight represents
an enormous outflow of funds from developing
countries.
THE MEASUREMENT OF POLITICAL
RISK
Causes of capital flight
• Inappropriate economic policies
government regulations, controls, and tax that lower
the return on domestic investment.

• Expectation of devaluation
They make the shift of capital when domestic interest
rates are artificially held down by their governments

• High political risk


PART II. ECONOMIC AND POLITICAL
FACTORS
II.Economic and Political Factors Primary focus: How well is the
country doing economically?
A. Fiscal Irresponsibility
Excessive government spending—is one sign of a country that is
likely to be risky because it will probably have an insatiable
appetite for money.
B. Monetary Instability
C. Controlled Exchange Rate System
-currency usually overvalued
D. Wasteful Government Spending
-inability to service foreign debt
ECONOMIC AND POLITICAL FACTORS

D. Resource Base
-lack of strong work ethic
E. Country Risk and Adjustment to
External Shocks
1.What are the impacts of
external shocks:
-how well a nation responds
varies
ECONOMIC AND POLITICAL
FACTORS

2. Key Indicators of Country Risk


a. Relative size of government
debt
b. Money expansion
c. Existence of government-
imposed barriers to market forces
ECONOMIC AND POLITICAL
FACTORS
2. Key Indicators of Country Risk
(con’t)
d. Level of tax rates
e. Amount of government-owned
firms
f. Political and fiscal responsibility
g. Amount and extent of
corruption
ECONOMIC AND POLITICAL
FACTORS

3. Key indicators of economic health


a. Structural incentives
b. Legal structure
c. Clear incentives to save
d. Open economy
e. Stable macroeconomic
policies
PART III. COUNTRY RISK ANALYSIS
IN INTERNATIONAL BANKING

I. Country Risk and the Terms of


Trade
What ultimately determines a nation’s
ability to repay foreign loans?
- the speed of adjustment
COUNTRY RISK ANALYSIS IN
INTERNATIONAL BANKING
II. The Government’s Cost/Benefit
Calculus
- debt to wealth ratio
- cost of default
- fluctuations in the terms of
trade
COUNTRY RISK ANALYSIS IN
INTERNATIONAL BANKING
III. Lessons from the International
Debt Crisis of 1982
Economic reforms that work:
• Strong head of state
• Viable economic plan
• Competent economic team
• Support “at the top”
• Sell the program to all levels of society

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