The Handbook of Country and Political Risk

Analysis
 How do you assess risk?

• Quantitative

• Qualitative
 Quantitative

• “Numbers” = numerical values

 Quantitative Data

• Primary data – personally gathered

• Secondary data – available statistics

 Qualitative

• substantial amount of expert insight,

• judgmental inputs, and
• subjective analysis
 Qualitative Approaches:

1. ‘Grand tour’ approach: field company

intelligence.

Disadvantages:
a) Subjective views
b) too much firsthand impressions.
 Qualitative Approaches:
2. Old hands’ approach: expertise analysis from
academia, intelligence and diplomats/practitioners.

3. ‘Power‐link’ approach: who’s who experts

Requires a detailed analysis of the structures of

political power in the country so as to identify
influence circles.
 Qualitative Approaches:
4. ‘Delphi’ approach: expert surveys.

Using a properly designed questionnaire.

Responses : compared and synthesized to
product high‐risk/low‐risk assessments.
COMPREHENSIVE COUNTRY RISK
 POLITICAL RISK MANAGEMENT

1. Business Environment Risk Intelligence (BERI)

2. Political Risk Services, (PRS)
3. International Country Risk Guide (ICRG)
4. Transparency International Corruption Perception Index
5. Kaji selidik Merdeka Center
6. Human Rights Watch
7. Ihs Energy Group Political Risk Ratings And Index
8. Anticipating Political Turmoil: Virtual Research Associates (VRA)
9. Political Risk Insurance: OPIC and Other Insurers
10.Control Risks Group (CRG)
11.Kajian Pusat Demokrasi dan Pilihan Raya Universiti Malaya (UMCEDEL)
 ECONOMIC AND FINANCIAL RISK

1. Economist Intelligence Unit (EIU)

2. EUROMONEY
3. Standard & Poor’s Ratings Group
4. Moody’s Investor Services
5. Fitch’s Investor Ratings
 Business Environment Risk Intelligence (BERI)

• Two permanent panels of experts that provide

country ratings and qualitative observations:
a) political conditions in countries, and
b) perspective on the operating environment.
• Private source for comprehensive ratings,
analyses, and forecasts for over 140 countries.
 Business Environment Risk Intelligence
(BERI)
• Areas of Expertise: Economic data and
forecast, Political and social trends &
development, Scenario Planning, International
and regional relations, Regulatory issues and
implications
• Rating Service – one year and five-year
forecast
 Business Environment Risk Intelligence
(BERI)
• Resulted from the respond of 100
experts/specialist – Delphi method
• Nationalism, corruption, nepotism, willingness
to compromise
• Societal conflict involving demonstrations,
strikes, street violence and guerrilla wars.
 Business Environment Risk Intelligence
(BERI)
• Policy continuity
• Bureaucratic
• Economic growth
• Labor costs/productivity
• Short-term credit
• Long-term loans
• Attitude toward foreign investors and profits
• Degree of privatization
• Balance of payments
• Communications and transportation
 Business Environment Risk Intelligence (BERI): Calculation

• Each variable is rated from zero (0) [highest

risk] to seven (7) [lowest risk].
• Then, BERI splits the PRI’s country results into
four categories from prohibitive risk (0-39
points), high risk (40-54 points), moderate risk
(55-69 points), up to low risk (70-100 points).
 Political Risk Services (PRS)

• Originally the Political Risk Services division of

Frost & Sullivan, Inc. and then of UK-based IBC
Group, the firm occupies a niche market in the
risk sector,
• Product : Political Risk Services (PRS) and the
International Country Risk Guide (ICRG).
 Political Risk Services (PRS)
• Political Risk Services (PRS)™ or the Coplin-
O’Leary Country Risk Rating System™ was
developed by Professors William D. Coplin and
Michael K. O’Leary during 20 years of research
at the Maxwell School of Citizenship & Public
Affairs, Syracuse University, along with the U.S.
Department of State, the Central Intelligence
Agency, other government agencies, and major
multinational corporations.
 Political Risk Services (PRS)
• Originality - its rating system process.
• 18-month and five-year forecasts of risk to
international business.
• processes several experts’ opinions for each
country under review.
• Firstly, experts look at a series of 17 variables,
and evaluate the current degree of risk or
restriction (current base level) on a four-unit
scale:
0 (low risk),
1 (moderate risk),
2 (high risk) and
3 (very high risk).
 Political Risk Services (PRS) –
18-month forecast

1.Turmoil (Kekacauan): actions that can result in threats or harm to

people or property by political groups or foreign governments.

2. Equity restrictions/sekatan: limitations on the foreign ownership of

businesses.

3. Operation restrictions: general quality of the operational business

environment, including regulations, efficiency of the officials, and
degree of corruption.

4. Taxation discrimination: possible discrimination vis-a-vis foreign

businesses, due to formal and informal tax policies.
 Political Risk Services (PRS) –
18-month forecast

5. Repatriation restrictions (Sekatan penghantaran pulang): formal

and informal rules regarding the repatriation of profit dividends and
investment capital.

6. Exchange controls: degree of freedom and easiness to convert local

currency to foreign currency.

7. Tariff barriers: the average and range of financial costs imposed on

imports.

8. Other import barriers: formal and informal quotas, licensing

provisions, or other restrictions on imports.
 Political Risk Services (PRS) –
18-month forecast

9. Payment delays: degree of punctuality with which government and

private importers pay their foreign creditors.

10. Fiscal and monetary expansion (dasar Fiskal): assessment of a

country’s fiscal and monetary policy as to whether it can generate a
healthy business climate or create economic disorders.

11. Labour policies: government policy, trade union activity, and

productivity of labour forces.

12. Foreign debt: relative size of the foreign debt and the ability of the
country’s public and private institutions to service it in due time.
 Political Risk Services (PRS) – 5-year forecast

13. Turmoil (kemelut): same item as in the 18-month list

but on a five-year horizon.

14. Investment restrictions (sekatan): the current base

and likely changes in the general climate for restricting
foreign investments.

15.Trade restrictions: the current base and likely changes

in the general climate for restricting the entry of foreign
trade.
 Political Risk Services (PRS) – 5-year forecast

16. Domestic economic problems: the ranking of the

country according to its most recent five-year performance
record in per capita GDP, GDP growth, inflation,
unemployment, capital investment and budget balance.

17. International economic problems: the ranking of the

country according to its most recent five-year performance
record in current account (as a percentage of GDP), the
ratio of debt service to exports, and the annual percentage
in the value of the currency.
 Political Risk Services (PRS)

• Secondly, experts try to identify the three

most likely political regimes that will be in
power, in 18 months and five years
respectively.
• Taking consideration of the possible future
political regimes.
 International Country Risk Guide (ICRG)

• Also produced by the PRS Group

• Covers about 140 countries.
• Produces three distinct risk categories on a
monthly basis: political, economic and financial,
as well as a composite risk rating derived from
the previous three indices.
• Assesses the current situation and makes
forecasts over one-year and five-year time
horizons.
 International Country Risk Guide (ICRG)

• The political risk rating aims the country’s degree of stability.

• It is obtained from the subjective assessment of ICRG
editors that transform qualitative information into
numerical scores through a series of present questions.
• This index is calculated as the sum of 12 social and political
qualitative components.
• The score may vary between zero and 100 points.
• Below 50 is considered as very high risk: 50-59.9 is high risk,
60-69.9 is seen as moderate risk, 70-79.9 is low risk; and 80-
100 is perceived as very low risk.
 International Country Risk Guide (ICRG)

The score may vary between zero and 100 points.

Very high risk : 0-50

High risk : 50-59.9
Moderate risk : 60-69.9
Low risk : 70-79.9
Very low risk : 80-100
 ICRG – Political Risk Components

Government stability [max. 12 points] - government

unity, legislative strength and popular support.
Socio-economic conditions [max. 12 points] -
unemployment, consumer confidence and poverty.
Investment profile [max. 12 points] - contract
visibility/expropriation, profits repatriation and
payment delays.
Internal conflicts [max. 12 points] - civil war,
terrorism/political violence and civil disorder.
 ICRG – Political Risk Components
External conflicts [max. 12 points] - war, cross-border
conflict and foreign pressures.
Corruption [max. 6 points] - the length of time a
government has been in power continuously
Military in politics [max. 6 points]
Religious tensions [max. 6 points] - degree of religious
freedom, and the capacity of several religious groups
to live in a harmony
 ICRG – Political Risk Components
Law and order [max. 6 points] - strength and
impartiality of the legal system, assessment of popular
observance of the law
Ethnic tensions [max. 6 points] - degree of tolerance
and compromise between various ethnics.
Democratic accountability [max. 6 points] - degree of
responsiveness of a government to its people. ICRG’s
five types of governance: alternating democracy,
dominated democracy, de facto one-party state, de jure
one-party state, and autarchy.
 ICRG – Political risks components

• Bureaucracy quality [max. 4 points] - the ability of the

local bureaucracy to administrate the country without
drastic changes in policy or interruption in
government services
 International Country Risk Guide (ICRG)

The economic risk rating evaluates the economic

strengths and weaknesses of a country.
A set of five purely quantitative components (ratios).
It goes from zero to a maximum of 50 points.
Very high risk : 0%-24.9%
High risk : 25%-29.9%
Moderate risk : 30%-34.9%
Low risk : 35%-39.9%
Very low risk : 40%-100%
 ICRG – Economic risks components

Real GDP growth (max. 10 points): the more growth, the

lower risk is assigned by ICRG.

Annual inflation rate (max. 10 points): the more inflation,

the riskier the country is.

Budget balance as a percentage of GDP (max. 10 points):

the more deficit, the riskier the country is.

Current account as a percentage of GDP (max. 15 points):

the more deficit, the riskier the country is.
 ICRG – Financial risks components

Foreign debt as a percentage of GDP (max. 10 points):

the higher the ratio, the riskier the country.

Foreign debt service as a percentage of exports of

goods and services (max. 10 points): the higher the
ratio, the riskier the country.

Current account as a percentage of exports of goods

and services (max. 15 points): the lower the ratio, the
riskier the country.
 ICRG – Composite Risk Rating

Political risk : 50%

Economic risk : 25%

Financial risk : 25%

 The Economist Intelligence Unit (EIU)

country risk ratings for 100 developing countries on a

quarter basis

uses only historical data and current expert

estimation.

EIU’s assessment - the existing situation

 The Economist Intelligence Unit (EIU)

The EIU method flows from experts’ answer to a series

of 77 qualitative and quantitative questions.

It results in a 100-point index (the higher the score,

the riskier the country), which is divided into five
bands: from A (lowest risk) to E (highest risk).
 The Economist Intelligence Unit (EIU)

Four general risk categories are analysed (political

risk, economic policy risk, economic structure risk,
liquidity risk), and are combined into an overall risk
index.

Other EIU’s investment-specific micro risk ratings

include currency risk, sovereign debt risk, banking
sector risk; addressing the particular needs and
concerns of certain groups of investors.
 EIU – Political Risk

Assessment is based on a set of 11 subjective points

split between issues of
- political stability;
- and political effectiveness.
 EIU – Economic Policy Risk

Addresses
1)the quality of the economic policy management;
2) the level of the economic performance.
 EIU – Economic Structure Risk

Deals with
1) the growth potential,
2) the degree of dependence of the country
 EIU – Economic Policy Risk

Addresses
1)the quality of the economic policy management;

2) the level of the economic performance.

 EIU – Liquidity Risk

• Focuses more specifically on the country’s short-term

financial strengths and weaknesses.
 Human Rights
• Human Rights Watch is an international human rights organization that
investigates and reports on abuses of human rights around the world. Currently,
it employs around 450 people, mostly country-based experts, lawyers,
journalists, and human rights workers who work to protect those at right.

• The organization works with and advocates towards governments, businesses

and armed groups, forcing them to change their policies and laws. To stay
independent, Human Rights Watch refuses government and corporate funding.
Researchers, who work directly on the field, uncover facts about human rights
abuses. These facts are shared with millions of people through social media
every day to gain global reach.

• https://www.humanrightscareers.com/magazine/international-human-rights-
organizations/