bài giảng môn tài chính quốc tế country risk analysis

 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 t

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

 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

 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:

12

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%

…

…

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

Example

From Scoring to Rating

Foreign Risk Decision Matrix

16

Political Risk

Financial and transfer Risk

Poor

Good

High Risk Zone

Acceptable Zone

Decision depending

on market and

profit potential