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Country Risk Analysis SOVEREIGN RISK RATING March 2012

Country Risk Analysis SOVEREIGN RISK RATING March 2012. Various approaches to country risk assessment. Qualitative analysis: financial, macroeconomic, legal, regulatory and political parameters; COFACE, Nord/Sud Export, EIU, IIF Quantitative approach : rating and scoring

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Country Risk Analysis SOVEREIGN RISK RATING March 2012

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  1. Country Risk AnalysisSOVEREIGN RISK RATINGMarch 2012 MH BOUCHET/CERAM-Global Finance

  2. Various approaches to country risk assessment • Qualitative analysis: financial, macroeconomic, legal, regulatory and political parameters; COFACE, Nord/Sud Export, EIU, IIF • Quantitative approach : rating and scoring • Econometric approach and modelization • Analytical approach: crisis typology (Indosuez) • Principal Component Analysis • Logit Analysis • Non-linear conditional analysis (threshold levels & breaking points: TAC) MH BOUCHET/CERAM-Global Finance

  3. Specialized Country Risk Rating institutions • BERI (Business Environment Risk Index) • Dun and Bradstreet, Moody ’s, S & P, Fitch • Institutional Investor • Frost & Sullivan • Euromoney • Fraser Instiotute • Credit Risk International (Paris) • International Country Risk Guide (NY/London) • Coface & Ducroire • Heritage Foundation • Transparency International • DBRS: http://cache.dbrs.com/pdf/20752303634573.pdf?transactionID=421961 MH BOUCHET/CERAM-Global Finance

  4. Quantitative approach: Rating • Means: Transforming a number of observations (Delphi method, surveys) or quantitative indicators into one number. • The various indicators can be weighted regarding their impact on creditworthiness and risk. • End-product: one single grade to assess past and current country risk situation with possible cross-country comparisons across time MH BOUCHET/CERAM-Global Finance

  5. Advantages/ Pros Simple cross-country comparison comparison across time shrinks a large number of variables into one single grade Reliable for smooth risk evolution Shortcomings/Cons “reductionist” oversimplistic risk of self-fulfilling prophecy little predictive value weighted average tends to bury salient trends Gives “market consensus” often made of herd instinct Country Risk Ratings MH BOUCHET/CERAM-Global Finance

  6. Shortcomings of rating agences (C. Kuhner, Schmalenbach Business review, January 2001) • Rating agencies are to be independent third parties that are consulted in the course of a market transaction. The goal is to overcome asymmetric information between both market sides by using standardized quality assessement methods. • Criticisms: • * Power without accountability • * Conformity bias • * Sociocultural bias • * Punishment of disobedient firms/countries that do not request a rating • * Procyclical bias, hence followjng the majority opinion of market participants without any early warning signals nor predictability track record MH BOUCHET/CERAM-Global Finance

  7. Asia, LTCM, US Subprime crises: some lessons to learn? • “Any agency which rated the Republic of Korea at the high investment grade rating of AA- (in the case of Fitch IBCA and S&Ps) or A1 (in the case of Moody’s) before the crisis, and which now rates Korea at a speculative grade B-, was clearly either wrong initially or subsequently. Clients are entitled to expect us to perform better in the future!” Fitch IBCA January 13, 1998 • “When the facts change, I change my mind” J.M Keynes MH BOUCHET/CERAM-Global Finance

  8. Rating = poor early warning signals? • South Korea wa s rated as Italy and Sweden as late as October of 1997! But abrupt downgrading to junk bond status during the crisis • « There were no early warnings about Korea from us or, to the best of our knowledge, from other market participants and our customers should expect a better job from us » • FICHT IBCA January 14, 1998 MH BOUCHET/CERAM-Global Finance

  9. The Perceived Situation • Was the crisis anticipated by rating agencies? MH BOUCHET/CERAM-Global Finance

  10. EUROMONEY’s Risk Rating http://en.wikipedia.org/wiki/Country_risk MH BOUCHET/CERAM-Global Finance

  11. Political Factors Weights Political Risk Rating Political factor A 30% Political factor B 50 Political factor C 20 Overall Country Risk Rating Financial Factors Weights Transfer Risk Rating Financial factor A 30% Financial factor B 40 Financial factor C 30 Quantifying Country Risk 30% 70% MH BOUCHET/CERAM-Global Finance

  12. Country Risk Rating • Foreign investment risk decision matrix • combines ratings of financial and political risk Low Acceptable Zone Political Risk Decision depending on market and profit potential High risk Zone High Low High Financial Risk MH BOUCHET/CERAM-Global Finance

  13. Moody’s Sovereign Ratings 02/2008 MH BOUCHET/CERAM-Global Finance

  14. Moody’s economic and financial Risk indicators: Argentina end-2007 MH BOUCHET/CERAM-Global Finance

  15. Country risk ratings? • Country risk analysis cannot & should not be boiled down to bond rating! • Risk might stem from a wide range of strategies, including FDI, exporting and importing, lending, portfolio investment, consultancy contracts…. MH BOUCHET/CERAM-Global Finance

  16. Quantitative Country Risk Appraisal Methods • BERI: Business Environment Risk Index (F.T. Haner, California-based) www.beri.com • Swiss-based private source for risk rating on over 130 countries • created in the late 1960s, the oldest risk assessment service. Delphi Method with a panel of 105 international experts rating 15 criteria for current and medium-term business horizon • 3 components of country risk: business climate, political stability, currency and repayment risk. • FORELEND reports (Forecast of Country Risk for International Lenders) MH BOUCHET/CERAM-Global Finance

  17. BERI S.A. • Economic, financial, monetary, operating and political conditions are integral components of the 0 (worst case) to 100 (best case) system for assessing countries. • Two risk indexes three times a year: ORI Operations Risk Index and PRI Political Risk Index. • Output: Remittance and repatriation Factor: the R Factor, with forecasts for +1 year and +5 years. MH BOUCHET/CERAM-Global Finance

  18. BERI S.A. Worst country ratings • Venezuela • Pakistan • Colombia • Indonesia • Ecuador • Nigeria • Ivory Coast • North Korea MH BOUCHET/CERAM-Global Finance

  19. EuromoneySemi-annual country risk scoring of 185 countries, both OECD and EMCsRating Methodology: • Panel of 32 leading economists in international financial institutions evaluing country performance in the financial markets (market access, spreads, selldown, terms and maturity…) • Scoring between 100 (excellent) and 0 (considerable risk) • + Panel of political analysts to measure short-term risk of destabilization MH BOUCHET/CERAM-Global Finance

  20. Euromoney • Euromoney establishes an overall score for countries using nine weighted categories which are calculated as follows: • the highest score in each category receives the full mark for the weighting; the lowest receives 0. In between, figures are calculated according to the formula: final score = (weighting / (maximum score-minimum score)*(maximum score-minimum score). The ranking shows the final scores after weighting. • Categories = • Economic performance (25% weighting), Political Risk (25%), Debt indicators (10%), Debt in default or rescheduled (10%), Credit ratings (10%), Access to bank finance (5%), Access to short-term finance (5%), Access to capital markets (5%) and Discount on forfaiting (5%). MH BOUCHET/CERAM-Global Finance

  21. Rating: EUROMONEY • Growth performance: 25% (GDP projections) • Political risk: 25% • External debt indicators: 10% (debt/GDP et debt/X) • External payment default and rescheduling: 10% • Credit rating Moody ’s or S&P: 10% • Short-term credit market access: 5% • Commercial bank MT credit: 5% • Capital markets access: 5% • Spread over US Treasury bills: 5% MH BOUCHET/CERAM-Global Finance

  22. 1= Luxemburg 2. Norway 3. Switzerland 14= France 19= Japan 26= HongKong 28= Taiwan 42= Poland 44= Chile 50= Mexico 54= China 62= Tunisia 65= Morocco 69= Egypt 79= Algeria 184= North Korea EUROMONEY: end-2007 Rating MH BOUCHET/CERAM-Global Finance

  23. End-2001 14= Singapore 28= Taïwan 30= HongKong 40= Chile 39= Hungary 40= Brunei 42= Poland 45= China 56= Malaysia 89= Romania 93= Bulgaria 163= Congo End-2005 9= Ireland 19= Singapore 22= New Zealand 35= Hungary 58= China 73= Iran 74= Vietnam 77= Russia 85= Algeria 96= Indonesia 127= Ivory Coast 182= Cuba EUROMONEY: Country Risk Rating 2007 20=Singapore 41=Hungary 42= Poland 54= China 57= Russia 76= Vietnam 77= Algeria 79= Iran 85= Indonesia 167= Ivory Coast 178= Congo 182= Cuba 185= North Korea MH BOUCHET/CERAM-Global Finance

  24. EUROMONEY Risk Rating: Ivory Coast Higher Risk Political upheaval Coup d’état Lower Risk MH BOUCHET/CERAM-Global Finance

  25. Scoring/Rating of Country Risk Institutional Investor • 0-100 semi-annual Rating of 136 countries’ creditworthiness based on survey of 100 leading international bankers • Best : Switzerland, Germany, Netherlands, United States, United Kingdom, France, Luxembourg… Singapore, Taiwan, Chile • Worst: Cuba, Nigeria, Benin, Sudan, Iraq, Congo, Sierra Leone, North Korea, Albania, Angola • II Global average rating as of March 2000 = 41 • II Global average rating as of March 2007 = 45 MH BOUCHET/CERAM-Global Finance

  26. Institutional Investor Risk Rating • Risk information provided by leading international banks. • Bankers are asked to grade each of the countries on a scale from 0 to 100, with 100 representing those countries with the best creditworthiness. • The sample for the study, updated every six months, ranges from 75 to 100 banks. The names of all participants in the survey are kept strictly confidential. • Banks are not permitted to rate their home country. The individual responses are weighted (> importance to responses from banks with greater worldwide exposure and more sophisticated country analysis systems) MH BOUCHET/CERAM-Global Finance

  27. Institutional Investor Risk Rating 1981-2007 Ivory Coast Higher Risk Coup d’état FCFA devaluation Lower Risk MH BOUCHET/CERAM-Global Finance

  28. Switzerland Norway Luxemburg Netherlands Finland Germany 13. France 17. Spain 21. Italy 60. Tunisia 67. Morocco 68. Algeria 72. Egypt 78. Venezuela 91. Argentina 117. Bolivia 124. Gabon 134. Cameroun 153. Congo 157. RCI 166. Iraq 171. Zimbabwe Institutional Investor: 2007 rating MH BOUCHET/CERAM-Global Finance

  29. Singapore= 16 Australia= 18 Hongkong= 24 Taiwan= 26 South Korea= 28 China= 34 Malaysia= 38 Thailand= 54 India= 58 Philippines= 73 Indonesia= 76 Vietnam= 77 Pakistan= 86 Sri Lanka= 100 Laos= 132 Cambodia= 140 Myanmar= 168 North Korea= 173 Institutional Investor2007 Risk Rating of ASIA MH BOUCHET/CERAM-Global Finance

  30. Institutional Investor (2007 rating) MH BOUCHET/CERAM-Global Finance

  31. Institutional Investor Risk Rating MH BOUCHET/CERAM-Global Finance

  32. Institutional Investor Risk Rating 1981-2007 MH BOUCHET/CERAM-Global Finance

  33. International Country Risk Guide • The ICRG Risk Rating System assigns a numerical value (risk points) to a predetermined range of risk components according to a preset weighted scale for each country covered by the system (PRS) • The risk components are grouped into 3 categories - Political, Economic and Financial. Each Risk Category is made up of a number of Risk Components. The sum of the Risk Points assigned to each Risk Component within each Risk Category determines the overall risk for that category. • The total Risk Points for each Risk Category are further combined, according to a formula, to produce a Composite Risk Rating. • Very High Risk 00.0 to 49.5 points High Risk 50.0 to 59.5points Moderate Risk 60.0 to 69.5 points Low Risk 70.0 to 79.5 points Very Low Risk 80.0 to 100 points MH BOUCHET/CERAM-Global Finance

  34. International Country Risk Guide: RCI FORECAST Coup d’état Composite Political, Financial and Economic Risk Rating with weighted average MH BOUCHET/CERAM-Global Finance

  35. OECD Credit rating 1997 Knaepen Package= convergence on the pricing of officially supported medium and long term export credits. One of the key elements of the Knaepen Package is a system for assessing country credit risk and classification of the countries into 7 categories. The Country Risk Classification Method measures the country credit risk, i.e. the likelihood that a country will service its external debt. The Country Risk Classification Method uses an econometric model based on quantitative indicators, e.g. the financial and the economic situation and the payment experience of the countries and takes account of possible qualitative factors, e.g. political and other economic and financial factors not included in the quantitative Econometric Model. The details of the Country Risk Assessment Model are confidential and not published. http://www.oecd.org/document/49/0,2340,fr_2649_34169_1901105_1_1_1_1,00.html MH BOUCHET/CERAM-Global Finance

  36. OECD Credit rating The final classification, based only on valid country risk elements, is a consensus decision of the sub-Group of Country Risk Experts that involves the country risk experts of the Participating Export Credit Agencies. The sub-Group of Country Risk Experts meets several times a year. These meetings are organized so as to guarantee that every country is reviewed each time a fundamental change is noticed and at least once a year. The meetings are confidential and no official reports of the deliberations are made. 8 country risk categories from 0 (no risk) to 7 (high risk) MH BOUCHET/CERAM-Global Finance

  37. OECD Country risk classification in 2008 MH BOUCHET/CERAM-Global Finance

  38. COFACE 140 countries Country rating definition: • Investment grade • A1= steady economic and political situation • A2= weak default probability • A3= adverse circumstances may lead to worsening payment record • A4= patchy payment record could be worsened by adverse economic/political developments • Speculative grade: • B= unsteady economic and poltical environment • C= bad payment record • D= high risk profile and very bad payment record MH BOUCHET/CERAM-Global Finance

  39. Canada= A1 Australia= A1 USA= A1 Japan= A1 Chile= A2 Korea= A2 Thaïland = A3 China = A3 Mexico = A3 India = A3 Croatia=A3 Poland = A3 Roumania =A4 Tunisia= A4 Algéria = A4 Brazill= A4 Cameroun= B Égypt = B Russia= B Indonésia= B Turkey = B Ukraine= C Congo= C Argentina = C Iran= D Venezuela= D RCI= D Nigeria= D Coface credit Rating (2008) MH BOUCHET/CERAM-Global Finance

  40. Tunisia: Macroeconomic indicatorssource: Coface MH BOUCHET/CERAM-Global Finance

  41. Coface: Payment arrears index in Tunisia (index 100= 1995) MH BOUCHET/CERAM-Global Finance

  42. AT KEARNEY: the globalizaton index • Index that measures a country’s global links, from foreign direct investment to international travel, telephone traffic, and Internet servers • Indicators combined into 4 sub-categories: • Economic integration (trade, FDI, portfolio capital flows, income payments, receips) • Technology (number of Internet users, Internet hosts, secure servers) • Personnal contact (international travel, tourism, international telephone traffic, cross-border transfers) • Political engagement (foreign embassies, participation in UN missions, number of memberships in international organisations) MH BOUCHET/CERAM-Global Finance

  43. The Globalization index MH BOUCHET/CERAM-Global Finance

  44. 1. Singapore 2. Ireland 3. Switzerland 4. US 5. Netherlands 6. Canada 7. Denmark 8. Sweden 9. Austria 10. Finland 11. New Zealand 12. UK 13. Australia 14. Norway 15. Czech Rep. 16. Croatia 17. Israel 18. France 19. Malaysia 20. Slovenia 52. Russia 54. China 62. Iran Globalization Index: The Top 20 /62 ATKearney MH BOUCHET/CERAM-Global Finance

  45. AT KEARNEY: the FDI confidence index • The FDI confidence index is constructed using primary data from a proprietary survey administered to senior executives of the world’s 1000 largest corporations. • The survey is designed to gauge the likelihood of investment in specific markets in order to gain insights into likely trends in global FDI flows over the next one to three years. • Index values are based on non-source country responses about various markets (eg: the index ranking for the United States reflects all non-US company responses about the US market) MH BOUCHET/CERAM-Global Finance

  46. FDI Confidence Index (AT Kearney), MH BOUCHET/CERAM-Global Finance

  47. World Economic Forum: Global competitiveness ranking • Growth prospects of 131 countries: up-to-date and comprehensive data source available on the comparative strengths and weaknesses of leading economies of the world. • Countries in The Global Competitiveness Report are ranked by the Growth Competitiveness Index (GCI) (GCI Rankings) and the Microeconomic Competitiveness Index (MICI) (MICI Rankings), which combined encapsulate the relative strengths and weaknesses of growth within each economy. MH BOUCHET/CERAM-Global Finance

  48. The 9 pillars of global competitiverness Hard + Soft DATA: Public debt + REER + interest rates + inflation + savings rate + legal and Regulatory framework + infrastructure + Education system and management schools…. MH BOUCHET/CERAM-Global Finance

  49. Global Competitiveness Index 2006-2007 MH BOUCHET/CERAM-Global Finance

  50. 2008 Ranking MH BOUCHET/CERAM-Global Finance

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