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Country Risk Analysis

Country Risk Analysis. Chapter 11. In this Chapter. MEASURING POLITICAL RISK ECONOMIC AND POLITICAL FACTORS KEY INDICATORS OF ECONOMIC HEALTH MANAGING POLITICAL RISK. Government Actions Causing Political Risk. Confiscation Expropriation Embargo Protective tariffs Currency controls.

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Country Risk Analysis

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  1. Country Risk Analysis Chapter 11

  2. In this Chapter • MEASURING POLITICAL RISK • ECONOMIC AND POLITICAL FACTORS • KEY INDICATORS OF ECONOMIC HEALTH • MANAGING POLITICAL RISK

  3. Government Actions Causing Political Risk • Confiscation • Expropriation • Embargo • Protective tariffs • Currency controls

  4. THE MEASUREMENT OF POLITICAL RISK • I. MEASURING POLITICAL RISK • Two Perspectives: • A. Country-specific • B. Industry-specific

  5. THE MEASUREMENT OF POLITICAL RISK • C. Political Stability • 1. Measured by: • a. Frequency of government changes • b. Level of violence • c. Number of armed insurrections • d. Conflict with other states

  6. THE MEASUREMENT OF POLITICAL RISK • D. Economic Factors • 1. Indicators of political unrest • a. Rampant inflation • b. Extreme balance of payment deficits • c. Slowed growth of per capita GDP

  7. THE MEASUREMENT OF POLITICAL RISK • E. Subjective Factors • 1. Profit Opportunity Recommendation • 2. Political Risk and Uncertain Property Rights

  8. THE MEASUREMENT OF POLITICAL RISK • CAPITAL FLIGHT • Definition • Measurement • Causes

  9. THE MEASUREMENT OF POLITICAL RISK • Capital Flight • a. Definition: • the export of savings by a • nation’s citizens because of • safety-of-capital fears. • b. Measurement: use the • balance-of- payment account

  10. b. Measurement: use the • balance-of- payment account Current Account Capital Account

  11. THE MEASUREMENT OF POLITICAL RISK • c. Causes of capital flight • 1.) Expectation of currency depreciation 2.) Inappropriate economic policies • 3.) High political risk • Example: Latin America in the 1980’s

  12. THE MEASUREMENT OF POLITICAL RISK • D. Other Factors • 1. Relative size of government debt • 2. Rate of money supply expansion • 3. Existence of government- imposed barriers to market forces

  13. COUNTRY RISK ANALYSIS • Primary focus: How well is the country doing economically?

  14. II. ECONOMIC AND POLITICAL FACTORS • A. Fiscal Responsibility • -high government deficits

  15. Economic and Political Factors • B. Monetary Stability • ΔMS > ΔMD • C. Freely-floating versus • Controlled Exchange Rate System • -currency usually overvalued • when currency is pegged.

  16. Economic and Political Factors • D. Government Spending • - Wasteful = inability to service foreign debt • E. Resource Base • -lack of strong work ethic

  17. III. Key indicators of economic health • 1. Structural incentives • 2. Legal structure • 3. Clear incentives to save • 4. Open economy (globally) • 5. Stable macroeconomic policies

  18. Key Indicators of Economic Health • 6. Level of tax rates • 7. amount of government-owned firms • 8. Political and fiscal responsibility • 9. Amount and extent of corruption

  19. IV. Managing Political Risk • How to Avoid Confiscation? • A. Pre-investment Planning • 1. Avoidance • 2. Insurance • 3. Structuring the investment

  20. Managing Political Risk • B. Operating Policies: • Develop local stakeholders

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