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COUNTRY RISK
ANALYSIS
BY GROUP 5
Country Analysis
Country analysis involves the examination and interpretation of a nation’s economic, social and political environment. The analysis offers a comprehensive overview of a country.
Objectives
To explain the techniques used to measure country risk; and
To explain how MNCs use the assessment of country risk when making financial decisions.
Why Country Risk Analysis Is Important
Country analysis is useful for: Investors in the financial market Companies intending to set up a subsidiary Companies wishing to enter a new market People wishing to reside in the country
Why Country Risk Analysis Is Important?
Country risk analysis can be used:
To monitor countries where the MNC is currently doing business.
As a screening device to avoid conducting business in countries with excessive risk.
To revise its investment or financing decisions in light of recent events.
FACTORS
FACTORS
ECONOMIC RISK
TRANSFER RISK
EXCHANGE RATE RISK
FACTORS
LOCATION RISK
SOVEREIGN RISK
POLITICAL RISK
Types of Country Risk Assessment
A macro-assessment of country risk is an overall risk assessment of a country without considering the MNC’s business.
A micro-assessment of country risk is the risk assessment of a country with respect to the MNC’s type of business.
Applications ofCountry Risk Analysis
As a result of the crisis that culminated in the Gulf War in 1991, many MNCs reassessed their exposure to country risk and revised their operations accordingly.
Applications ofCountry Risk Analysis
The 1997–98 Asian crisis caused MNCs to realize that they had underestimated the potential financial problems that could occur in the high-growth Asian countries.
Applications ofCountry Risk Analysis
Following the September 11, 2001 attack on the United States, some MNCs reduced their exposure to country risk by downsizing or discontinuing their business in countries where U.S. firms may be subject to more terrorist attacks.
Techniques of Assessing Country Risk
The Checklist approach involves rating and weighting all the macro and micro political and financial factors to derive an overall assessment of country risk.
The Delphi technique involves collecting various independent opinions and then averaging and measuring the dispersion of those opinions.
Techniques of Assessing Country Risk
Quantitative analysis techniques like regression analysis can be applied to historical data to assess the sensitivity of the business to various risk factors.
Inspection visits involve traveling to a country and meeting with government officials, firm executives, and consumers to clarify uncertainties.
FIn 763: Lecture 2 15
What Factors do Ratings include?
Standard & Poors and Moody‘s are the two largest
rating agencies.Other agencies: Duff & Phelps, Fitch, Political Risk Services, Beri …
S&P concentrates on 8 categories to come up with their ratings
Each of this categories is related to the two major sources of risk: economic and political risk
RISK Analysisof INDIA
INDIA RANK 12TH IN THE GROWING ECONOMY
GDP GROWTH
FDI & FPI
EASE OF
DOING BUSINESS RANK ( 181 COUNTRIES) CHANGE
2009 2008
DOING BUSINESS 122 126 4
STARTING A BUSINES 121 126 -7DEALING WITH CONSTRUCTION
PERMITS 136 131 -5
EMPLOYING WORKERS 89 89NO
CHANGE
REGISTERING PROPERTY 105 114 -9
GETTING CREDIT 28 25 -3
PROTECTING INVESTORS 38 33 -5
PAYING TAXES 169 167 -2
TRADING ACROSS BORDER 90 81 -9
ENFORCING CONTRACTS 180 180NO
CHANGE
CLOSING A BUSINESS 140 140NO
CHANGE
Overall country risk
ratings
Current monthPrevious month
12 months ago
India BBB BBB -
Bangladesh B B -
Pakistan B B -
Sri Lanka BB BB -
THANK U!!!
ECONOMIC RISK
Economic Risk is the significant change in the economic structure or growth rate that produces a major change in the expected return of an investment.
Arises from the changes in fundamental economic policy goals
Economic structure risk ratings
Current monthPrevious month
12 months ago
India BBB BBB -
Bangladesh CCC CCC -
Pakistan BB BB -
Sri Lanka B B -
TRANSFER RISK
Transfer Risk is the risk arising from a decision by a foreign government to restrict capital movements. Restrictions could make it difficult to repatriate profits, dividends, or capital.
It usually is analyzed as a function of a country's ability to earn foreign currency, with the implication that difficulty earning foreign currency increases the probability that some form of capital controls can emerge.
EXCHANGE RATE RISK
Exchange Risk is an unexpected adverse movement in the exchange rate. Exchange risk includes an unexpected change in currency regime such as a change from a fixed to a floating exchange rate.
A country's exchange rate policy may help isolate exchange risk. Managed floats, where the government attempts to control the currency in a narrow trading range, tend to possess higher risk than fixed or currency board systems.
Floating exchange rate systems generally sustain the lowest risk of producing an unexpected adverse exchange movement.
The degree of over- or under-valuation of a currency also can help isolate exchange rate risk.
Currency risk ratings
Current month
Previous month
12 months ago
India BBB BBB -
Bangladesh BB BB -
Pakistan B B -
Sri Lanka BB BB -
BACK
LOCATION RISK
Location or Neighbourhood Risk includes spillover effects caused by problems in a region, in a country's trading partner, or in countries with similar perceived characteristics.
Geographic position provides the simplest measure of location risk. Trading partners, international trading alliances, size, borders, and distance from economically or politically important countries or regions can also help define location risk
SOVEREIGN RISK
Sovereign Risk concerns whether a government will be unwilling or unable to meet its loan obligations, or is likely to renege on loans it guarantees.
Sovereign risk can relate to transfer risk in that a government may run out of foreign exchange due to unfavorable developments in its balance of payments
Sovereign risk ratings
Current monthPrevious month 12 months ago
India BBB BBB -
Bangladesh CCC CCC -
Pakistan B B -
Sri Lanka B B -
POLITICAL RISK
Political Risk concerns risk of a change in political institutions stemming from a change in government control, social fabric, or other non-economic factor. This category covers the potential for internal and external conflicts, expropriation risk and traditional political analysis.
Political risk ratings
Current month
Previous month
12 months ago
India BB BB -
Bangladesh CCC CC -
Pakistan CC CC -
Sri Lanka B B -
Year Inflation rate (consumer prices)
2003 5.40%
2004 3.80%
2005 4.20%
2006 4.20%
2007 5.30%
2008 6.40%
2009 8.30%
2010 10.70%
COUNTRY PERCENTAGE
INDIA 7-12%
PAKISTAN 13-22%
SRI LANKA 7-12%
BANGLADESH 13-22%
PERCENTAGE OF PEOPLE WHO HAVE GIVEN BRIDE IN LAST 12 MONTH
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