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Unit-05- Country Risk Analysis

Structure:

5.1 Introduction

Objectives

5.2 Overview of Country Risk Analysis

History

Rating agencies

5.3 Purpose of Country Risk Analysis

5.4 Methodology

Data sourcing

Tools

5.5 Contents of Analysis

Country history

Corporate risk

Dependency level

External environment

Domestic financial system

Ratios for economic risk evaluation

Strength and weakness chart

5.6 Risk Premium

5.7 Summary

5.8 Glossary

5.9 Terminal Questions

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5.10 Answers

5.11 Case-Let

5.1 Introduction

In the previous unit you studied about the importance of ethics at the workplace and itsapplication in a global business environment. Work ethics involves a set of moral values and

certain standards of behaviour. Ethics is important in all aspects of life as it forms the basis of a

cultured society.

This unit deals with the concept of country risk analysis and its purpose. Country risk analysis is

the evaluation of possible risks and rewards from business experiences in a country. It is used tosurvey countries where the firm is engaged in international business, and avoids countries with

excessive risk. With globalisation, country risk analysis has become essential for the

international creditors and investors.

In this unit, you will learn about the purpose, importance and various methodologies to analyse a

countrys risk profile. You will also be introduced to the concepts of contents of analysis and the

risk premium.

Objectives:

After studying this unit you should be able to:

explain country risk analysis.

discuss the importance of analysing a countrys risk.

interpret the methodologies involved in country risk analysis.

analyse a countrys risk profile.

5.2 Overview of Country Risk Analysis

Country Risk Analysis (CRA) identifies imbalances that increase the risks in a cross-border

investment. CRA represents the potentially adverse impact of a country's environment on the

multinational corporation's cash flows and is the probability of loss due to exposure to the

political, economic, and social upheavals in a foreign country. All business dealings involverisks. An increasing number of companies involving in external trade indicate huge business

opportunities and promising markets. Since the 1980s, the financial markets are being refined

with the introduction of new products.

When business transactions occur across international borders, they bring additional risks

compared to those in domestic transactions. These additional risks are called country risks whichinclude risks arising from national differences in socio-political institutions, economic structures,

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policies, currencies, and geography. The CRA monitors the potential for these risks to decrease

the expected return of a cross-border investment. For example, a multinational enterprise (MNE)that sets up a plant in a foreign country faces different risks compared to bank lending to a

foreign government. The MNE must consider the risks from a broader spectrum of country

characteristics. Some categories relevant to a plant investment contain a much higher degree of

risk because the MNE remains exposed to risk for a longer period of time.

Analysts have categorised country risk into following groups:

Economic riskThis type of risk is the important change in the economic structure that

produces a change in the expected return of an investment. Risk arises from the negative changesin fundamental economic policy goals (fiscal, monetary, international, or wealth distribution or

creation).

Transfer riskTransfer risk arises from a decision by a foreign government to restrict capital

movements. It is analysed as a function of a country's ability to earn foreign currency. Therefore,

it implies that effort in earning foreign currency increases the possibility of capital controls.

Exchange riskThis risk occurs due to an unfavourable movement in the exchange rate.

Exchange risk can be defined as a form of risk that arises from the change in price of onecurrency against another. Whenever investors or companies have assets or business operations

across national borders, they face currency risk if their positions are not hedged.

Location riskThis type of risk is also referred to as neighborhood risk. It includes effects

caused by problems in a region or in countries with similar characteristics. Location risk includes

effects caused by troubles in a region, in trading partner of a country, or in countries with similar

perceived characteristics.

Sovereign riskThis risk is based on a governments inability to meet its loan obligations.Sovereign risk is closely linked to transfer risk in which a government may run out of foreign

exchange due to adverse developments in its balance of payments. It also relates to political risk

in which a government may decide not to honor its commitments for political reasons.

Political riskThis is the risk of loss that is caused due to change in the political structure or

in the politics of country where the investment is made. For example, tax laws, expropriation ofassets, tariffs, or restriction in repatriation of profits, war, corruption and bureaucracy also

contribute to the element of political risk.

Risk assessment requires analysis of many factors, including the decision-making process in thegovernment, relationships of various groups in a country and the history of the country. Country

risk is due to unpredicted events in a foreign country affecting the value of international assets,

investment projects and their cash flows. The analysis of country risks distinguishes between theability to pay and the willingness to pay. It is essential to analyse the sustainable amount of funds

a country can borrow. Country risk is determined by the costs and benefits of a countrys

repayment and default strategies. The ways of evaluating country risks by different firms andfinancial institutions differ from each other. The international trade growth and the financial

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programs development demand periodical improvement of risk methodology and analysis of

country risks.

5.2.1 History

Earlier, the cross-border business risk was an issue that affected those who had transactions orassets to receive from foreign customers. In the 1970s, the financial institutions were not well

equipped to deal with country risk. However, to improve the business; they enhanced theirexposure in foreign markets which required capital. In many cases, the loans were contracted

without regular notice to credit dealings of both the borrower and the country.

Since the 1980s, problems concerning the payback of those credits started affecting countries

such as Mexico, Poland, and Brazil, whose defaults caused heavy losses for the international

banks. As a result, this caused huge loss for investors and shareholders. So, the financialinstitutions started adopting new analytical ways, maximum risk policies and strong credit

procedures, all those supported by reliable data.

5.2.2 Rating agencies

The rating agencies use country credit risk ratings and provide a periodical and organised skill ofdata. It deals with a cross-border analysis. There are several agencies like Standard and Poors,Moodys, Economist Intelligence Unit, Euro money, Institutional Investor, Political Risk

Services, Business Control Risks Information Services, Environmental Risk Intelligence,international banks in general and others institutions. The rating agencies provide information

and analysis of economic sectors, companies, and operations assigning its related ratings.

The credit rating agencies issue credit ratings based in the European Union and are used by

investors, borrowers, issuers, and public administrations to help them make investment andfinancial decisions. These ratings are used as a reference for calculating their capitalrequirements for calculating risks in their investment activity.

The Standard and Poors, and Moodys rating approach divide countries in categories and thefour first levels of each one are considered as investment grades (better quality of the asset in

risk terms). Based on their assessment of a bond issue, the agencies give their view in the form of

letter grades, which are published for use by investors. For the typical investor, risk is judged notby an instinctively formulated probability distribution of possible returns but by the credit rating

assigned to the bond by investment agencies. In their ratings, the agencies rank issues according

to the probability of default. Both agencies have a Credit Watch list that makes aware the

investors when the agency considers a change in rating for a particular borrower.

Investing agencies credit rating

Let us now study credit rating by various investing agencies.

Moodys

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The table 5.1 represents Moodys credit rating.

Table 5.1: Moodys Credit Rating

Rating Description

Aaa Best qualityAa High quality

A Upper medium grade

Baa Medium grade

Ba Acquire speculative elements

B Normally lack characteristics of a

desirable investment

Caa Poor standing: may be in default

Ca Speculative in a high degree; often in

a default

C Lowest grade; extremely poorprospects

Standard and Poors

The given table 5.2 represents Standard and Poors credit rating.

Table 5.2: Standard and Poors Credit Rating

Rating Description

AAA Highest rating - extreme capacity to pay

interest or principalAA Very strong capacity to pay

A Strong capacity to pay

BBB Adequate capacity to pay

BB Uncertainties that lead to inadequatecapacity to pay

B Greater vulnerability to default, but

currently has capacity to pay

CCC Vulnerable to default

CC For debt subordinated to that with CCC

ratingC For debt subordinated to that with CCC -

rating or bankruptcy petition has been filed

D In payment default

Source:http://www.gwu.edu/~ibi/minerva/spring2001/renato.ribeiro.pdf

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This section analysed the concept of country risk analysis and credit rating by investing agencies.

The next section discusses the purpose of country risk analysis.

Self Assessment Questions

1. The ___________ provide information and analysis of economic sectors, companies, andoperations assigning its related ratings.

2. __________ arises from a decision by a foreign government to restrict capital movements.

a) Transfer risk

b) Political risk

c) Location risk

d) Economic risk

3. The rating agencies have come up with country credit risk ratings and provide a periodical and

organised skill of data. (True/False)

5.3 Purpose of Country Risk Analysis

Let us now understand the purpose of country risk analysis.

Risk arises because of uncertainty and uncertainty occurs due to the lack of reliable information.Country risk is composed of all the uncertainty that defines the risk of country exposure. The

assessment of country risk is used to incorporate country risk in capital budgeting and modify thediscount rate.

CRA regulates the estimated cash flows and explores the main techniques used to measure a

countrys overall riskiness. It is mainly used by MNCs, in order to avoid countries withexcessive risk. It can be used to monitor countries where the MNC is engaged in international

business. Analysing the country risk helps in evaluating the risk for a planned project considered

for a foreign country and assesses gain and loss possibility outcomes of cross-border investmentor export strategy.

Activity 1

Discuss on how monitoring of credit rating activities are carried out.

Hint: Refer these links for guidance

http://europa.eu/legislation_summaries/internal_market/single_market_services/financial_service

s_transactions_in_securities/mi0009_en.htm

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http://www.prnfunding.com/factoring-process

5.4 Methodology

Country detailed risk refers to the unpredictability of returns on international business

transactions in view of information associated with a particular country. The techniques used bythe banks and other agencies for country risk analysis can be classified as qualitative or

quantitative. Many agencies merge both qualitative and quantitative information into a singlerating. A survey conducted by the US EXIM bank classified the various methods of country risk

assessment used by the banks into four types. They are:

Fully qualitative method - The fully qualitative method involves a detailed analysis of a

country. It includes general discussion of a countrys economic, political, and social conditions

and prediction. Fully qualitative method can be adapted to the unique strengths and problems ofthe country undergoing evaluation.

Structured qualitative methodThe structured method uses a uniform format withpredetermined scope. In structured qualitative method, it is easier to make comparisons between

countries as it follows a specific format across countries. This technique was the most popular

among the banks during the late seventies.

Checklist method - The checklist method involves scoring the country based on specific

variables that can be either quantitative, in which the scoring does not need personal judgment ofthe country being scored or qualitative, in which the scoring needs subjective determinations. All

items are scaled from the lowest to the highest score. The sum of scores is then used to determine

the country risk.

Delphi techniqueThe technique involves a set of independent opinions without groupdiscussion. As applied to country risk analysis, the MNC can assess definite employees whohave the capability to evaluate the risk characteristics of a particular country. The MNC gets

responses from its evaluation and then may determine some opinions about the risk of the

country.

Inspection visitsInvolves travelling to a country and conducting meeting with government

officials, business executives, and consumers. These meetings clarify any vague opinions thefirm has about the country.

Other quantitative methodsThe quantitative models used in statistical studies of country

risk analysis can be classified as discriminant analysis, principal component analysis, logitanalysis and classification and regression tree method.

Note: Refer this link for examples and detailed description of country risk assessment methods

tps://www.shsu.edu/~eco_hkn/CRISK_revised04.pdf

5.4.1 Data sourcing

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The basic data is important to analyse a country. The economic, financial and currency risk

components are based on the variables (quantitative and qualitative variables). The variablesmust consider the particularities of each country and the needs of the model used. The standard

variables are used to maintain the regular analysis comparable with similar works of other

countries. Therefore, the first step is to make sure that the historical series of official data are

reliable, consistent and comparable. The standard economic variables that are found mainly inthe varied approach adopted by financial institutions and rating agencies, are associated with the

countrys real ability to repay its commitments. The balance of payments (summary account of

economic transactions among a country and the others nations of the world, during a period) andits evolution through the years means a strong source of data. The exchange rate (currency risk)

is another important variable considered, as it balances the transactions (balances the prices of

goods, services, and capital) between residents and non-residents. The analysis must consider thehistorical behavior of the exchange rate and the policy which made clear whether the country

follows a rational economics approach or it uses the exchange rate as a tool to maintain a forced

macroeconomic equilibrium.

Apart from the macroeconomic variables which deal with the external sector of the economy,there are some other relevant variables such as the interest rate, level of investments, public debt

and its service, internal savings, consumption, GDP or GNP, money supply, inflation rate and soon.

The analysis must be accomplished with qualitative variables, which consider social aspects as

population, life expectancy, rate of birthday, rate of unemployment, level of literacy and so on.

The social-political aspects are necessary for all kind of analysis as they describe the whole

setting of the running economy.

5.4.2 Tools

The risk management demands a regular follow up regarding governmental policies, external and

internal environment, outlook provided by rating agencies, and so on. Following are the tools

recommended:

Chain of value - Includes the main countries that sustain trade relationships with the nation,broken by sectors and products.

Strength and weakness chart - Focus the key aspects that warn the country.

Table of financial markets performance - Follow up the behavior of bonds and stocks

already issued and to be issued.

Table of macroeconomic variables - Provides alert signals when the behavior of any ratio

presents a relevant change.

Self Assessment Questions

4. _____________ explores the main techniques used to measure a countrys overall riskiness.

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5. Which of the following methods involve a detailed analysis of a country and includes general

discussion of a countrys economic, political and social conditions and prediction?

a) Structured qualitative method

b) Checklist method

c) Fully qualitative method

d) Regression tree method

6. The standard variables must be used to maintain the analysis regular and comparable withsimilar works about other countries. (True/False)

7. The __________ method involves scoring the country based on specific variables that can beeither quantitative or qualitative.

5.5 Contents of Analysis

The content of country risk analysis mainly involves country history, corporate risk, dependency

level, external environment, domestic financial system, ratios for economic risk evaluation andstrength and weakness chart.

5.5.1 Country history

The historical brief helps to identify aspects that interfere in the future behavior of the country,reducing the ability to payback any external commitment. The main historical data provides a

good understanding of the key factors which draw the behaviour of the society, the government,the private sector, the legal environment, the economical, political, and the relationships to

neighbour nations and the world as a whole.

The organisation of the government and its features like political and administrative organisation

are also relevant aspects to be approached. The political forces which act in the country, theirrepresentatives and the main national issues must be focused. The other considerations include

social aspects and their key-indicators like population growth rate, unemployment ratio, infant

mortality rate, composition of the population and life expectancy. The geographic positioningand its related strengths and weaknesses are also critical aspects.

5.5.2 Corporate risk

Both country risk studies and business risk analysis enhances wealth from the available

resources, in terms of capital, natural resources, technology and labour forces. This clarifies thatthose kind of analysis procures extensive knowledge from the business approach for companies,

including financial theory.

5.5.3 Dependency level

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The next step after the history in brief, is a clear definition about how the country is positioned in

the world in terms of its wide relationships, economic block in which it belongs to, importance ofinternational trade and so on. All these aspects are significant to identify the dependency level of

the country. The financial dependency to meet the needs of a country is also a strong concern for

the analyst. In this case, the maturity of debts (internal and external) and the available sources of

financing also help to measure the freedom grades of the country.

In case of output spread throughout the economy, the analyst can break the GDP`s economicsector, evaluate its composition in terms of values of participation of each one and the level of

regional concentration. It is similar to corporate approach when analysing the income structure.

The same approach can be made in case of the international trade where the analyst must breakup each part of the trade balance in sectors, countries and economic blocks, goods, identifying its

composition and level of concentration (percent and value). It would be convenient to get the

ratio between the trade balance and the GDP (sum of imports and exports over the GDP).

Financial issues also must be clarified, as how much is been supported by domestic or external

savings. At this moment, the conclusions can be listed to point out the parts that remainsignificant for the understanding about dependency level of the country and its freedom levels.The conclusions about the approach towards the dependency level and the level of concentration

in producing and trading goods are the key factors to understand the economys trend.

5.5.4 External environment

The external trade is an important factor to the development of societies. Globalisation hasbrought international business to the center of the discussions and the external environment has

become vital for all countries.

Thus, a complete vision on economic trends, the behavior of financial markets, the forecasts forconflicts among nations, the improvement of the economic blocks, the level of openness of the

world economy, financial crisis and international liquidity is a framework over which theanalysis must start.

The analyst must select the issues that are closely related to the country dealt with, to figure out

the impact of the most likely situation and to apply over the country`s economic variables. The

dependency level, external landscape, its trends and the ratio between GDP and external trade

will provide useful information to connect the external sector to the domestic sector in order toidentify opportunities and threatens.

5.5.5 Domestic financial system

The banking sector has implemented many actions to avoid losses, after the international crisis.

Basel Committee has defined some strong measures to be followed by the financial houses andCentral Banks are trying to monitor their jurisdictions. Apart from those procedures, recently

Asia and Turkey crisis have shown that the inspection is not enough to keep the reliability of

some domestic system. The international banks had developed many tools to deal withinternational crisis. When domestic banks do not have a consistent risk management policies and

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adequate provisions to theirs credits, the country risk happens to be the worst. Therefore, the

analysis must consider the health of the domestic financial system, by evaluating informationprovided by the Central Banks and, from the principal banks of the country. Accessing Centrals

Bank policies and supervising procedures also help to evaluate the health of the financial system.

5.5.6 Ratios for economic risk evaluation

Cross-border economic risk analysis evaluates the probable macroeconomic ratios among somevariables. They can be separated into two groups such as domestic and external. The figures

must be presented in historic series (at least five years) to provide information about its progress,

which can be real values, percentages, or relations. The mainly used ratios and variables in caseof domestic economy are the following:

Gross domestic product (GDP) - The real value must be broken up by sector (agriculture,construction, services and manufacturing), by private and public sector and by principal goods

and services.

GDP per capita - Its growth determines the country`s productivity. Many rating systems use

this ratio because it helps to clarify the efficiency of the countrys growth rate.

GDP growth rate - The annual rate can be also broken up in the same way, to mention the

sectors or products that have a specific behavior for better understanding of the economy`s trend.

Unemployment rate - It deals among several aspects, with the labor factor and give details on

performance of the whole economy, conditions presented by the internal market and the political

environment. This ratio, combined with growth rate data, the analysis reveal strategic issues thatthe economic policy must approach.

Internal savings or GDP - This ratio work with the tendency of saving of the whole economy.Gross domestic savings can be broken by economic agents (householders, firms and

government).

Investment or GDP - This percentage reveals how strong could be the economy in the future

as it gives a potential rate of capital improvement, named the gross fixed capital formation. It is

important to break this information up in sectors to understand about the growth of economy.

Gross domestic fixed investment or variation of GDP - The ratio assesses the quality of the

previous (since around five years before) investment decisions in terms of its efficiency in

growing the GDP.

Gini Index - It estimates the income distribution among different groups in society. This ratio,combined with the development of GDP per capita, it reveals about the strength of internal

market.

Growth domestic fixed investment or gross domestic savings - The ratio that describes the

domestic savings maintains the investment made at the economy. This ratio, combined with

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domestic fixed investments and net capital imports, specifies the dependency of the economy on

foreign resources.

We discussed on macroeconomic variables that deals with the amount or quality of the product

provided by the economy, in a certain period of time. But, the fiscal side is also important

because it helps to understand the role of the government and its significance in the entireeconomy. Thus, the following ratios are considered:

Budget deficit or GDP - The growth of this ratio denotes how the dissavings increase the

resource gap. A solution must be found to balance the outcome and to straighten the economic

fundamentals.

Internal debt or GDP - This ratio combined with the budget deficit and GDP ratio, reveals

about how much the public sector uses the savings of the country.

The monetary policy is essential as it deals with the price stability. An economy which presents

less instability in its prices of goods and services, provides huge facilities to decision makersbased on their predictions to expected returns of investments and a firm social, economical and

political environment. All these aspects request a systematic approach over price indicators such

as the following:

Real interest rate - This is a dominant measure about the assurance of economic agents, which

deals with their prospect on the future of the economy. The price of the currency has an inverserelation with the investment and when it rises, the whole economy shows a decline on its

performance. The advancement of the rate must be measured after extracting the effects of the

inflation during the period.

Percentage increase in the money supply - This reveals how policy makers deal with thevariations on the stock of currency that is considered during the analysis of the governmentbudget to identify whether the public sector forces the supply of currency in order to support

current shortfalls.

The mainly used ratios and variables in case of external economy are the following:

External debt or GDP - This ratio represents the whole external debt importance to one yearflow of production. If the ratio is lower, the external financial position of the economy will be

improved.

Short term debts and reserves - This ratio shows how much the reserves are committed byamortisations in the short run. The debts maturity is essential to identify whether a country have

problems to repay its liabilities.

Exchange currency rate - This is a well-known type of country risk. The exact price of the

currency in market terms is necessary for the economic stability and the growth of the country.The exchange rate contributes to a profitable allocation of resources in the whole economy apart

from preventing artificial losses or gains of competitiveness and their impacts in the trade

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balance. Many countries are implementing a flexible exchange rate system in order to better set

the price of their currencies. Thus, the exchange rate forms an essential part of country riskanalysis and must be strictly followed to make out any unusual behavior.

External debt services and exports - The developing markets find their main source of funds

to produce strong foreign currency to support amortisations from the external debts. The exportsmust be large enough to pay interest and principal on the exceptional foreign debt. The foreign

currency will not be available to meet payments, if the exports are not large. This financial ratiobrings a sensible application of the countrys ability to pay, similar to a cash flow coverage ratio.

5.5.7 Strength and weakness chart

In order to explain the significant aspects provided by the analysis, the strength and weakness

chart can be used to merge each strength and weakness with the related scenario. The belowgiven tables 5.3 and 5.4, contain some variables that are put up from combined experiences about

an imaginary country. It is a model of relationships among several variables (quantitative and

qualitative) to show their interdependency and the complexity of analysis.

Table 5.3: Strength Chart

Strength factors Possible outcome

Increase in IDH performance High

government approval rate

Lesser social demands

Population profile allows economic

equilibrium

Enough supply of labor force

Well-defined social-economic plans Support for private economic

decisions

Available environmental resources No constrains in terms of rawmaterials

Budget equilibrium on the short run No more pressures over interest rates

Relevant internal market Opportunity for private profits

Sustainable GDP growth rate Reduction of unemployment rate

Strong and well managed privatesector

Entrepreneur culture

Modern and well-regulated bankingsystem

Less risk in a volatile situation

Rise in the growth fixed capital

formation

Positive forecasts for future growth

Floating exchange rate Flexibility for market adjustments

Sustainable decrease on interest rates Better conditions for investments

High level of reserves and imports Room to deal with liquidity

constrains

Long-term maturity public internal

debt

Budget compatible debt services

Efficacious monetary policy Less volatility of returns for investors

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Import profile concentrated in capitalgoods

Positive forecasts for future growth

History of no external conflicts Stability in external relationship

Table 5.4: Weakness Chart

Weakness factors Possible outcome

Increase in the strategic raw

materials prices

Rise in foreign currency expenditures

Economic block integration remain

slow

Limited trade improvement

External environment presenting

instabilities

Diverse contagious risks. Rise in

spreads

Income concentration Social pressures

Restrictions to sustain GDP`s growth Risk of government`s income

reductionSlowdown in developed countries Limited market for exports

Decrease in commodities export

prices

Risk of trade balance deficit

Strong resource gap External flows dependency

Low levels of literacy and skill laborforces

Productivity restrictions

Expressive ratio internal debt or GDP Sterilisation of private savings

Reductions on capital inflows Risk of currency devaluation

Investors concerns on the financial

marketsLiquiditys lack to developingnations

Worsening in the terms of trade Pressure over current account

balance

Worsening in the ratio external debt

and GDP

Risk of downgrade in country grades

Improve in the ratio CA deficit and

GDP

Improvement in capital flows needs

Forecasts for trade balance deficit Improvement in capital flows needs

Raise in international interest rates Increase in the external debt

Source:http://www.gwu.edu/~ibi/minerva/spring2001/renato.ribeiro.pdf

The depicted charts stress the risks shown during the analysis and it must be assessed in terms of

the observed macroeconomic performance provided by the ratios mentioned earlier.

5.6 Risk Premium

Several restrictions exist to build econometric models to deal with country risk analysis as a

whole. The most familiar models are used for capital market investment, where the prices of the

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assets and theirs related instabilities helps to follow the behavior of securities. However,

managing credit risk demands a score to distinguish different sorts of risk among nations. In thiscase, after receiving the outcomes from the macroeconomic and social ratios, it is possible to

make a rating to block those countries that show similar behavior.

Peer analysis splits the countries according to the observed performance and an automatic ratingsystem can be applied to similar countries. The approach remains essential to confirm the

recognised scores. Thus, the analyst contributes to define the final risk level. Depending on theuses of the analysis, an exposure limit can also be defined. Its value is obtained from a strategic

definition provided by the in charge of this issue and must be consistent with the attributed

country ratings when defining each exposure limit.

Activity 2

Discuss on how country risk must be built in for valuations in emerging markets.

Hint: Refer this link for guidance

- http://gcg.universia.net/pdfs_revistas/articulo_104_1227718800862.pdf

Self Assessment Questions

8. Which among the following is a dominant measure about the assurance of economic agents,

which deals with their prospect on the future of the economy?

a) Real interest rate

b) Exchange currency rate

c) GDP growth rate

d) Unemployment rate

9. Gross domestic fixed investment estimates the income distribution among different groups in

society. (True/False)

10. The growth of __________ ratio denotes how the dissavings increase the resource gap.

5.7 Summary

Let us summarise what we have learnt in this unit on country risk analysis:

Country risk analysis (CRA) identifies imbalances that increase the risks in a cross-borderinvestment.

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Country risk is composed of all the uncertainty that defines the risk of country exposure. The

assessment of country risk is used to incorporate country risk in capital budgeting and modify thediscount rate.

Country detailed risk refers to the unpredictability of returns on international business

transactions in view of information associated with a particular country.

The content of country risk analysis mainly involves country history, corporate risk,dependency level, external environment, domestic financial system, ratios for economic risk

evaluation and strength and weakness chart.

Managing the credit risk demands a score to distinguish different sorts of risk among nations.

5.8 Glossary

Capital budgeting: The process in which a business determines whether projects such as

building a new plant or investing in a long-term venture are worth pursuing.

Deficit: Excess of expenses over income or liabilities over assets.

Expropriation: Legally The act of removing property from an owner.

Macroeconomics: The branch of economics which deals with aggregates such as capital and

labour, and their interactions in an economy as a whole.

5.9 Terminal Questions

1. Explain country risk analysis.

2. Discuss the importance of analysing a countrys risk.

3. Describe the methodologies involved in country risk analysis.

4. Interpret contents of analysis.

5. Analyse a countrys risk profile.

5.10 Answers

Self Assessment Questions

1. Rating agencies

2. a) Transfer risk

3. True

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4. Country risk analysis

5. c) Fully qualitative

6. True

7. Checklist

8. a) Real interest rate

9. False

10. Budget deficit or GDP