Attention of readers is invited to our earlier post on country risk with the title Country Risk is an Evolving and Dynamic Risk.
As we are aware, country risk is the risk that a foreign government will default on its bonds or other financial commitments. Country risk also refers to the broader notion of the degree to which political and economic unrest affect the securities of issuers doing business in a particular country.
In this write up we shall analyse various aspects of country risk analysis
Country Risk
Why?
– For better policy decision and
– to be aware of degree of risk warning signal
Users
– Governments,
– various ministries,
– bankers,
– exporters, importers and
– insurance companies
When do we need?
– To analyse economic and / or political developments,
– to schedule / reschedule financial obligations and
– upon specific request
Type of country risk
– Transfer risk (exchange control related)
– War / civil commotion / external aggression
– Controls – Trade related
– Exchange rate fluctuations
– Buyers’ default risk (sovereign risk)
Methodology for country risk analysis
– Economic risk rating
– Political risk rating
– Economic and political relations
– Berne Union Experience (BU Experience)
Let us now analyse various other parameters associated with country risk analysis
Political situation
– Past history
o Foreign Rule
o Independence
o System of government
o Coup
– Present political situation
o Stable government
o Red tapism
o Position of opposition
o Political violence
International relation
– Relationship with neighbors
– Relationship with developed countries
– Membership with trade blocks
– Membership with financial institutions / arrangements
Economy
– Factors contributing to the growth of economy
– Gross Domestic Product and its growth
Agriculture
– Main crops
– Self sufficiency
– Dependency
– Government policy
Industry
– Level of industrialization
– Degree of ownership
– Efficiency and quality control
– Government policy
Mining
– Natural endowments
– Mineral deposits
– Extent of mining
– Dependency
– Infrastructure
– Government policy
Service sector
– Types
– Development and growth
– Infrastructure
– Educational policy
– Skill development
Inflation
– Levels
– Policies
Currency
– Strong / weak
– Policies
International reserves
– Reserve position
– Imports cover
Foreign trade
– Composition
– Agriculture / Minerals / Manufactured?
– Import substitution efforts
– Direction
– Export Import policy changes
Balance of payment
– Record of transaction
– Trade balance / deficit – surplus
– Current account balance / deficit – surplus
– Capital account balance / deficit – surplus
– Effect
External debt
– Degree of debt
– Short term debt vs total debt
– Short term debt vs long term debt
– Debt service ratio
Aid
– Grants or commodity gifts
– Countries giving aid
Berne Union experience
– Political stability
– Economic development
– External payment position
– Transfer delays
Well. These are sample parameters to arrive at a reasoned country risk analysis.