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Country Risk Analysis: Presented By: Abhishek Nabar Anup Pillai Malkesh Patel Shijo Mathew

This document defines country risk analysis and discusses factors involved in assessing country risk. It provides an overview of political, financial, economic, and subjective factors considered in country risk analysis. It also discusses types and measurements of country risk analysis, how it is used, indicators of high risk countries, and compares risk ratings between countries. The key purpose of country risk analysis is to evaluate potential risks and rewards from business operations in foreign countries.

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Shijo Mathew

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0% found this document useful (0 votes)

101 views20 pages

Country Risk Analysis: Presented By: Abhishek Nabar Anup Pillai Malkesh Patel Shijo Mathew

Uploaded by

Shijo Mathew

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Download as PPTX, PDF, TXT or read online on Scribd

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COUNTRY RISK

ANALYSIS

Presented By : Abhishek Nabar

Anup Pillai
Malkesh Patel
Shijo Mathew
Definition
 Country Risk Analysis is assessment of potential risks and rewards
from doing business in a country

 Country risk represents potentially adverse impact of a country’s

environment on the cash flow of the firm

Risk Perception
 Sovereign risk applies specifically to the creditworthiness of
governments as borrowers

 Political risk refers to political factors that might impair a borrower’s

ability to pay
Importance
 Used to monitor countries where the firm is
presently engaged in international business

 Used by the firm as a screening device to

avoid countries with excessive risk

 Used to assess particular forms of risk for a

proposed project considered for a foreign
country
Awareness of Country Risk
 Crisis in Mexico 1982
 Crisis in China in 1989
 1997 East Asian Currency crisis
 Crisis in Iraq
 Crisis in Iran, Afghanistan
 Recent sub-prime crisis starting in USA
Factor
s

Financ Politic
ial al

Subjec Economic
Conditions
tive

12/08/2021 Country Risk Analysis 5

Political Risk Factors
 Attitude of host government and
consumers of host country
 War
 Currency inconvertibility
 Blockage of fund transfers
 Corruption

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Financial Risk Factors
 Current and potential state of the
country’s economy
 Financial distress
 Additional host government restrictions
 Moratorium on fund transfer
 Interest rates, exchange rates and
inflation

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Economic Conditions
 Diversification of the economy
 Degree of reliance on a few key exports
and the effects of a decline in the
worldwide prices of those exports
 Exchange rate devaluation
 Frequency of government intervention in
the money market and the ceilings of
interest rates
 Possibility of recession
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Subjective factors
 Country’s attitude towards private
enterprise
 Risk of currency devaluation
 External flows dependence
 Productivity restrictions
 Social pressures
 Attitude of consumers in the host
country

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Types of Country Risk Assessment
 Macro-assessment of country risk

 Country characteristics that affect profits

 Micro-assessment of country risk

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Use of country risk assessment
 Incorporating country risk in capital budgeting

 Adjustment of the discount rate

 Adjustment of the estimated cash flows

 Application of country risk analysis

11
Indicators of high country risk
 Large government deficit relative to GNP
 High taxes
 Vast state-owned firms
 Attitude: Government’s role to maintain living standards
 Corruption
 Absence of basic government institutions
 Almost all are common for the developing countries!!!!!!

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Measurement of Country Risk
 One way to measure Country Risk is checklist
approach, and it involves:
 Assigning values and weights to political and financial risk
factors,
 Multiplying the factor values with their weights, and
summing up to give the political and financial risk ratings,
 Assigning weights to the risk ratings, and
 Multiplying the ratings with their weights, and summing up
to give the country risk rating
 Delphi technique
 Inspection visits
 Combination of techniques

12/08/2021 Country Risk Analysis 13

Country Risk Measurement

12/08/2021 Country Risk Analysis 14

Derivation of Country Risk

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Comparing Risk Ratings
 An MNC may evaluate country risk for several countries,
perhaps to determine where to establish a subsidiary
 Foreign investment risk matrix (FIRM)
 FIRM is used to develop a matrix that categorizes
countries based on political risk and economic risk as
 Acceptable
 Unacceptable
 Uncertain for investment
 The importance of political risk versus economic risk
varies with the intent of the MNC

12/08/2021 Country Risk Analysis 16

FIRM- Foreign investment risk matrix

2 dimensional mapping of
 Political risk component
 Economic risk component

How an MNC analyses risk

 Stage1 – Use FIRM - to eliminate risky countries
 Stage2 – Country risk profile
 Stage3 – Investment Risk analysis
 Stage4 – Foreign investment risk Audit

12/08/2021 Country Risk Analysis 17

World Threat Perception - Terrorism

 Terrorism has added a new dimension in the country risk

assessment
 Middle East
 Iraq
 Iran – nuclear ambition, internal consternation
 Israel – Hamas-Israeli cycle of violence
 Asia
 Afghanistan – warlords back in the game, on their own side
 Indonesia – Jemmah Islamia, Al-Qaeda’s kissing cousin
 Philippines – domestic terrorists

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THANK YOU