bài giảng môn tài chính quốc tế country risk analysis

Introduced by
Assoc. Pr. Dr. Truong Quang Thong
The Faculty of Banking – UEH
(based on Pr. H. Bouchet’s slides)
August 2012
INTERNATIONAL FINANCE
TÀI CHÍNH QUỐC TẾ
Lecture 8:
Country Risk Analysis
1
Overview

Identify common factors and indicators used to
measure a country’s political risk.

Identify common factors used to measure a
country’s financial and economic risks.

Explain the techniques used to measure country
risk
2
Country Risk Analysis – Why?

To assess risk versus opportunity
prospects.

To screen out excessively risky
country.

To use in a proposed capital
budgeting project and to assess

gain & loss probability outcomes
of cross-border investments.
3
What is country risk?

Country risk is the possibility that a
foreign country’s borrower may be
unable or unwilling to fulfill its debt
servicing obligations toward s foreign
lender and/or investor.

Country risk is composed of a
complex combination of political,
transfer and systemic risk.
4
Main public and private sources of country risk
intelligence

IMF/ World Bank

IIF / BIS / OECD

ADB, EBRD

Eximbank

S&P, Moody’s

….
5

Main components of country risk

Political risk

Economic risk

Financial and transfer risk

Exchange risk

Cultural environment risk

Legal and contractual risk

Regional contamination risk

Systemic risk
6
Risk assessment in the global firm

Political risk is the risk incurred by the lenders or
investors that the repayment of a loan or the repatriation of
an investment be restricted by the arbitrary decision of the
state (confiscation, repudiation, nationalization…).

Transfer risk is the risk that a foreign country may
impose restriction on remittances of capital, dividends,
interest, fees, debt payments … due to exchange
restrictions, discretionary balance of payment policies…


Systemic risk is a risk stemming from the spill-over (or
contamination) effect of financial imbalances in a region or in
a market.
7
Political Risk Factors

Attitude of the government vis à vis FDI.

Suden shift in government’ stance (contract repudiation, change
in legal and regulatory framework…)

Attitude of consumers in the host country.

Attitude of the government

Blockage of fund transfer

Currency inconvertibility

Civil war, expropriation, confiscation

Capital repatriation and dividend remittance constraints

Bureaucracy
8
Techniques to Assess Political Risk

Checklist approach

Examine all political factors that effect a country’s

risk: the Prince Model.

Delphi technique

Collect independent opinions on country risk

Establish surveys
9
The Prince Model
1. Identifying the power structure of a nation (key individual
actors whose degree of influence or concern can effect
the outcome of an issue important to international
business.
2. Recording the position of major individuals or groups
according to whether it supports, is neutral toward or
opposes the action or event
3. Assigning probability calculation
4. Estimating likelihood of business gain or loss
10
Various approaches to country risk assessment

Qualitative analysis: financial, macroeconomic, legal, regulatory and
political parameters…

Quantitative approach: rating and scoring

Pricipal component analysis

Econometric approach and modelization


Logit analysis

…
11
Quantitative approache: Rating

Use of a weighted average of factors
affecting creditworthiness (ex.:
political, economic, financial,
structural, external…)

Example of some variables:

Import cover of official reserves

Short term debt/X+R

…
12
13
Quantifying Country Risk
-
Poli. factor 1
-
Poli factor 2
-
Poli factor 3
-
Eco. factor 1
-

Eco. factor 2
-
Eco. factor 3
Overall
Country Risk
Scoring
Political Risk
Scoring
Structural Risk
Scoring
Debt
Management
Debt
Scoring
30%
20
%
20
%
Weights
30%
50%
20%
30%
40%
30%
Economic Risk
Scoring
30%
…

…
14
Short term perspective Medium term perspective
Weight Score Weighted
Score
Weight Score Weighted
Score
Political 0,3 80 24 0,3 70
21
Economic 0,3 90 27 0,2 70
14
Structural 0,2 60 12 0,3 50
15
Debt
Management
0,2 75 15 0,2 60
12
78
62
Example
15
From Scoring to Rating
Overall Scoring Rating
91-100 AAA Very good
81-90 AA
71-80 A
61-70 BBB Medium
51-60 BB
41-50 B
31-40 CCC Bad

21-30 CC
11-20 C
0-10 D Very risky
Foreign Risk Decision Matrix
16
Political
Risk
Financial and transfer Risk
Poor
Good
Poor Good
High Risk Zone
Acceptable
Zone
Decision
depending
on
market and
profit
potential