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COUNTRY RISKS
• Most OECD & many non-OECD countries have GSE’s insuring FDI against political risk.
• Political Risk – World Bank definition: Political risks are associated with government actions which deny or restrict the right of an investor/owner i) to use or benefit from his/her assets; or ii) which reduce the value of the firm. Political risks include war, revolutions, government seizure of property and actions to restrict the movement of profits or other revenues from within a country
OECD uses a variety of macro measurements to construct country risk classification for trade credit insurance. Link
Taiwan
China
Malaysia
India
Indonesia
Philippines
Thailand
Viet Nam
Papua New G
uinea Fiji
MongoliaNepal
Bangladesh
Bhutan
Cambodia
Sri Lanka
North Korea
Lao
Myanmar
Pakistan
Afghanistan
Solomon0
1
2
3
4
5
6
7
8
OECD COUNTRY RISK CLASSIFICATION 2013
Currency Controls: Malaysia
• In current financial markets, many emerging markets will impose currency controls to keep hot money from entering the market.
• In 1998, Malaysia implemented controls to keep foreign investors from exiting the market forcing them to wait 1 year to repatriate financial income.
Link
Nationalization:Venezuela
19951996
19971998
19992000
20012002
20032004
20052006
20072008
20092010
-2
-1
0
1
2
3
4
5
6
7
8
Venezuela FDI (% of GDP)
x
Chavez: Venezuela will nationalize gold mines
Chavez orders nationalization of CargillVenezuelan President Hugo Chavez said Wednesday he had ordered the nationalization of at least some of the operations of the U.S.-based food giant Cargill and threatened to do the same with the Caracas-based food maker Polar
Link
Link
Theories of Conflict World Development Report 2011 Chapter 2• Rapid Change and Rising
Expectations• Voracity and Resource Curse• Horizontal Inequality• Lack of State Capacity• Poor Institutions.
Political violence associated with:• Rapid Urbanization• Youth Unemployment• Income Inequality• Weak Governance• Low growth, low income
countries with high natural resource share more than 10 times as likely to experience political violence.
Link
Link
Regimes• Autocracy: Self-perpetuating regime with ability to strictly limit activities
of political opposition.• Anocracy: Regime w/o electoral democracy but lacking means to
completely eliminate opposition or lacks direct instruments of self-perpetuation.
• implementing a staged transition from autocracy to greater democracy.• institute piecemeal reforms due to increasing demands from emerging political
groups.• weakened by corruption or dissension and losing their capacity to maintain strict
political controls and suppress dissent.
Democracy Open Anocracy Closed Anocracy Autocracy4.5
4.7
4.9
5.1
5.3
5.5
5.7
5.9
6.1
6.3
OECD Developing Country Risk
Anocracies are by far most likely to see government threatening instability.
Global Report 2014 Conflict, Governance, and State Fragility
Fiscal RISKS
Debt IMF Fiscal Monitor
Figure 2. Sovereign Bond Yield Spreads over German Bunds(Basis points)
Sources: Bloomberg L.P.; Datastream.Note: 10-year sovereign bond yields.
0
200
400
600
800
1000
1200
1400
1600
1800
Jan -10 Ap r-10 Jul-10 Oct-10 Jan -11 Ap r-11 Jul-11
Countries w ith Programs Supported by EU/IMF
Greece
Irelan d
Po rtug al
Latv ia
Ro man ia
0
50
100
150
200
250
300
350
400
450
Jan -10 Ap r-10 Jul-10 Oct-10 Jan -11 Ap r-11 Jul-11
Selected European Countries
Sp ain
Belg iumItaly
Fin landNeth erlands
IMF Fiscal Monitor
Crisis spreads to other countries
Background Reading
End This Year End Last Year This YearDebt Debt Overall Deficit
This Year
This Year
This Year
General Expenditure
General Revenue
Overall Deficit
This Year This YearOverall Deficit Overall Balance
Primary Deficit
• Simplified Government Budget
Primary Revenue (less Interest Income)
- Primary Expenditure (less Interest Paid)
Primary Budget Deficit
+ Net Interest Payments on Existing Debt
Overall Budget Deficit
• If
then Debt-to-GDP ratio stays stable.
• If > then deficit is “unsustainable”
(1 )
VThis Year Last Year
VThis Year Last Year
Overall Deficit Debtg
GDP g GDP
Sustainable Deficit
A growing economy allows the government to borrow some money every year and still keep debt in line with overall GDP
(1 )
VThis Year Last Year
VThis Year Last Year
Primary Deficit Debtg i
GDP g GDP
This Year This Year This Year
This Year This Year This Year
Overall Deficit Primary Deficit Net Interest
GDP GDP GDP
Sustainable Primary Deficit
~
(1 )
Average Interest
This Year Last YearV
This Year Last Year
Net Interest Debti
GDP g GDP
• If
then stays stable.( )Net Debt
GDP
Primary Balance
•
% o
f G
DP
0
20
40
60
80
100
120
140
160
180
200
Value; 181.837
Net Debt to GDP, Greece%
o G
DP
http://www.imf.org/external/pubs/ft/fm/2011/02/fmindex.htm
32.9062534.5
34.5
Australi
a
Austria
Belgium
Canad
a
Czech Rep
ublic
Denmark
Estonia
Finlan
dFra
nce
German
y
Greece
Hong Kong S
AR1
Icelan
d
Irelan
dIsr
ael
Italy
Japan
Korea
Netherl
ands
New Ze
aland
Norway
Portuga
l
Singa
pore
Slova
k Rep
ublic
Slove
niaSp
ain
Swed
en
Switz
erlan
d
United Kingd
om
United St
ates
22.8
72.3
94.684.1
41.1 44.3
6.0
50.2
86.9 82.6
165.6
31.6
101.2109.3
71.1
121.1
233.1
32.0
65.5
35.3
55.4
106.093.5
44.9 43.6
67.4
36.052.4
80.8
100.0
7.7
52.5
79.9
34.9
0.0 1.8
-1.7
-59.7
81.0
57.2
0.0 0.0
67.1
98.8
67.5
100.4
130.6
30.8 30.6
7.8
-161.0
101.8
0.0 0.0 0.0
56.0
-20.8
50.8
72.9 72.6
Debt as % of GDPGross Debt Net Debt
Consequences of Deficits
• Austerity• Financial Repression• Seignorage• Default
2008 [YR2008] 2009 [YR2009] 2010 [YR2010] 2011 [YR2011] 2012 [YR2012] 2013 [YR2013]10000
11000
12000
13000
14000
15000
16000
17000
18000
19000
20000
GDP per capita (constant LCU)
Financial Repression• Indebted governments often draw
financing from captive financial institutions to keep interest rates low.
• Domestic banks, public pension funds• Increased reserve requirements• International capital controls.
Link
Seignorage - Central Bank prints money to buy government debt.
Link
Final Exam
• Saturday, December 13th, LG5201 12:30-3:30.• Cumulative. Similar to mid-term and practice exams.• Bring writing instruments and a calculator.• Semi-open book – Bring 1 A4 size paper with handwritten notes on
both sides. • Office Hours: Standard TR 4:30-5:30 and MW 2-3:30.
1 (1 )
(1 ) (1 )
(
This Year Last Year
This Year Last Year
VLast Year Last Year This Year
V VLast Year Last Year This Year
VThis Year
This Year
Debt Debt
GDP GDP
Debt Debt Overall Deficitg
g GDP g GDP GDP
Overall Deficit g
GDP
1 )
Last YearV
Last Year
Debt
g GDP
1
(1 )This Year Last Year This Year
VThis Year Last Year This Year
Debt Debt Overall Deficit
GDP g GDP GDP
Can you run a deficit every year?
