Transcript Shapiro: Chapter 5 - Villanova University

Shapiro: Chapter 11
Country Risk Analysis
Types of Political Risk
• Expropriation
“Venezuela Seizes Control
of Two Oil Fields”
- New York Times, 4/3/06
• “… Venezuela’s populist government
said Monday that it had taken control
of fields operated by two European
energy giants after they challenged
new rules that give the state extensive
control of 32 mostly marginal fields
that, until now, had been managed by
foreign multinationals.”
“Venezuela Seizes Control
of Two Oil Fields”
- New York Times, 4/3/06
• “The move was the latest in the
government’s efforts to assert itself
over the country’s oil reserves, the
hemisphere’s largest, and end the
preferential deals that were offered by
Venezuela in the 1990’s to entice
companies to explore for oil.”
“Venezuela Seizes Control
of Two Oil Fields”
- New York Times, 4/3/06
• “In the Orinoco heavy-oil region…
where giant multinationals like
ExxonMobil and Chevron have much
of their investments, the government
has increased royalties to 16.6 percent
from 1 percent and is now planning on
raising taxes to 50 percent from 34
percent.”
“Venezuela Seizes Control
of Two Oil Fields”
- New York Times, 4/3/06
• “Venezuela, though, had never taken
over fields as it did on Saturday, after
the contracts that Total and Eni had
with the Energy Ministry were ended.”
“Chavez Threatens to End Oil Exports
to U. S. in Exxon Feud”
- The New York Times, 2-11-08
• “President Hugo Chavez
threatened Sunday to halt oil
exports to the United States if the
oil giant ExxonMobil succeeds in
freezing billions of dollars of
foreign petroleum assets controlled
by Venezuela.”
“Chavez Threatens to End Oil Exports
to U. S. in Exxon Feud”
- The New York Times, 2-11-08
• “Venezuela’s government has been
seething since Exxon recently won
orders in British, Dutch and American
courts freezing as much as $12 billion
in Venezuelan oil assets abroad –
refineries and other oil-related
infrastructure that Venezuela owns.”
“Chavez Threatens to End Oil Exports
to U. S. in Exxon Feud”
- The New York Times, 2-11-08
• “In fact, despite a deterioration in
political relations, the United States
remains Venezuela’s top trading
partner. Venezuela is the fourth-largest
supplier of crude oil to the United
States, sending 1.2 million barrels a
day to American refineries …”
Types of Political Risk
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Expropriation
Currency controls
Trade controls
Tax and labor laws
Types of Political Risk
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Expropriation
Currency controls
Trade controls
Tax and labor laws
Regulatory restrictions
Types of Political Risk
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Expropriation
Currency controls
Trade controls
Tax and labor laws
Regulatory restrictions
Local production requirements
Country Risk Analysis
• Political Stability
• Economic Factors
• Subjective Factors
Political Stability
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Frequency of government change
Level of violence
Number of armed insurrections
Conflicts with other states
– ie., India vs. Pakistan
Political Stability
• Third World Countries:
• “They lack social cohesion,
political legitimacy, and the
institutional infrastructure
necessary for economic growth.”
Economic Factors
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Inflation
Balance of payments
Growth rate of per capita GDP
“In general, the better a country’s
economic outlook, the less likely it is
to face political and social turmoil that
will inevitably harm foreign
countries.”
Subjective Factors
• Attitude toward:
– private enterprise
– multinationals
–foreign direct investment (FDI)
“Wal-Mart’s German Retreat”
[BusinessWeek Online, 7-28-06]
• “The U. S. price-cutting retailer
made a series of bad moves and
has now sold its stores to the
competition.
• After nine years of trying to make a
go of it, the … retailer said July 28
it will sell its 85 stores to German
rival Metro.”
“Wal-Mart’s German Retreat”
[BusinessWeek Online, 7-28-06]
• “Wal-Mart (WMT) will pay dearly for
its about-face, which comes amid
declining market share at its Asda
stores in Britain and follows its
retreat from South Korea two
months ago. The company is
taking a $1 billion hit to quit the
market, …”
“Wal-Mart’s German Retreat”
[BusinessWeek Online, 7-28-06]
• “The retreat is hardly surprising
given Wal-Mart’s numerous
missteps in Germany. Perhaps its
most glaring was misjudging the
German consumer and business
culture.”
“Wal-Mart’s German Retreat”
[BusinessWeek Online, 7-28-06]
• “For instance, German Wal-Mart’s
adopted the U. S. custom of
bagging groceries, which many
German consumers find distasteful
because they tend not to like
strangers handling their food.”
“Wal-Mart’s German Retreat”
[BusinessWeek Online, 7-28-06]
• “It also imported its U. S.-style
company ethic, which includes
strongly discouraging interoffice
romances. Many employees found
the code intrusive. The company
also had repeated clashes with
unions.”
“Wal-Mart’s German Retreat”
[BusinessWeek Online, 7-28-06]
• “Wal-Mart was not very humble
when they went in, … They wanted
to impose their own culture.
• … Wal-Mart’s apparent underestimation of the competition and
its miscalculation of the market.”
Political Risk & Property Rights
• Uncertainty over property rights
• Government’s ability to
expropriate:
– legal title
– stream of income
• Constraints on use of property
Key Questions to Ask
• Has reform been institutionalized?
• Are regulatory and legal systems
fair?
• Is the government competent in
maintaining currency and political
stability?
Capital Flight
• Export of savings; legal and illegal
• Fear of safety of capital
(purchasing power)
• Impact of:
– inflation
– devaluation (Mexico-1994)
– artificially low interest rates
“Polo-Loving Banker Lives
Really Large In Chávez Socialism”
[The Wall Street Journal, 1/29/08]
• “Venezuela’s 22.5% inflation rate
is the highest in the Western
Hemisphere. Its currency has lost
half its value in the past year on a
thriving black market for dollars.
“Polo-Loving Banker Lives
Really Large In Chávez Socialism”
[The Wall Street Journal, 1/29/08]
• “To prevent capital flight, Mr.
Chávez banned overseas money
transfers and has barred Venezuela’s media from mentioning the
black market. Some now call it the
‘market that cannot be
mentioned’.”
“Polo-Loving Banker Lives
Really Large In Chávez Socialism”
[The Wall Street Journal, 1/29/08]
• “Bankers have made money
playing the huge gap between the
official and the black-market
exchange rates.”
“Polo-Loving Banker Lives
Really Large In Chávez Socialism”
[The Wall Street Journal, 1/29/08]
• “One common way, which is legally
permitted: buying dollar-bonds from
the government at the official rate of
2.15 “strong bolivars” per dollar, and
reselling them to investors for a price
close to the black-market rate of 5.50
per dollar.”
Country Risk: Europe
• Over-regulated economies
• Inflexible labor markets
• Overly expansive social welfare
programs
Country Risk: United States
• Litigation risks
• Employment laws
• Environmental laws
Country Risk: Japan
• Rigid business system
• Extensive government regulation
• Strong social traditions
Economic Risk Factors
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Fiscal irresponsibility
Monetary instability
Controlled exchange rate systems
Wasteful government spending
Country Risk Factors (1)
 Large government deficit relative to
GDP
 High rate of monetary expansion
 Low yielding government expenditures
 Price controls
 Interest rate ceilings
 Trade restrictions
Country Risk Factors (2)
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Rigid labor laws
High tax rates
Many state-owned firms – “statism”
Socialist philosophy – “government’s
responsibility”
• Pervasive corruption
Positive Economic Factors
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Economic incentives
Secure legal rights
Low taxes
Free markets
Minimal regulations
Stable economic policies