3:13 pm - Monday December 17, 5060

Country Risk analysis

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.

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