Transcript CHAPTER 6 Country Risk Analysis

CHAPTER 6
Country Risk Analysis
PART I. THE MEASUREMENT OF
POLITICAL RISK
I. MEASURING POLITICAL RISK
A. Country-specific perspective
THE MEASUREMENT OF POLITICAL
RISK
B. Political Stability
1. Measured by:
a.
Frequency of government
changes
b.
Level of violence
c.
Number of armed
insurrections
d.
Conflict with other states
THE MEASUREMENT OF POLITICAL
RISK
C. Economic Factors
1. Indicators of political
unrest
a. Rampant inflation
b. Balance of payment
deficits
c. Slowed growth of per
capita GDP
THE MEASUREMENT OF POLITICAL
RISK
D. Subjective Factors
1.
2.
Profit Opportunity
Recommendation
Political Risk and Uncertain
Property Rights
THE MEASUREMENT OF POLITICAL
RISK
3. Capital Flight
a.
b.
Definition:
the export of savings by a
nation’s citizens because of
safety-of-capital fears.
Measurement: use the
balance-of- payment account
THE MEASUREMENT OF POLITICAL
RISK
c.
Causes of capital flight
1.)
2.)
3.)
Inappropriate economic
policies
Expectation of devaluation
High political risk
PART II. ECONOMIC AND POLITICAL
FACTORS
II.
Economic and Political Factors
Primary focus: How well is the
country doing economically?
A. Fiscal Irresponsibility
-high government deficits
B. Monetary Instability
C. Controlled Exchange Rate System
-currency usually overvalued
D. Wasteful Government Spending
-inability to service foreign debt
ECONOMIC AND POLITICAL
FACTORS
D. Resource Base
-lack of strong work ethic
E. Country Risk and Adjustment to
External Shocks
1.
What are the impacts of
external shocks:
-how well a nation responds
varies
ECONOMIC AND POLITICAL
FACTORS
2. Key Indicators of Country Risk
a.
b.
c.
Relative size of government
debt
Money expansion
Existence of governmentimposed barriers to market forces
ECONOMIC AND POLITICAL
FACTORS
2.
Key Indicators of Country Risk
(con’t)
d.
e.
f.
g.
Level of tax rates
Amount of government-owned
firms
Political and fiscal responsibility
Amount and extent of
corruption
ECONOMIC AND POLITICAL
FACTORS
3. Key indicators of economic health
a.
b.
c.
d.
e.
Structural incentives
Legal structure
Clear incentives to save
Open economy
Stable macroeconomic
policies
PART III. COUNTRY RISK ANALYSIS
IN INTERNATIONAL BANKING
I.
Country Risk and the Terms of
Trade
What ultimately determines a nation’s
ability to repay foreign loans?
- the speed of adjustment
COUNTRY RISK ANALYSIS IN
INTERNATIONAL BANKING
II. The Government’s Cost/Benefit
Calculus
- debt to wealth ratio
- cost of default
- fluctuations in the terms of
trade
COUNTRY RISK ANALYSIS IN
INTERNATIONAL BANKING
III. Lessons from the International
Debt Crisis of 1982
Economic reforms that work:
• Strong head of state
• Viable economic plan
• Competent economic team
• Support “at the top”
• Sell the program to all levels of society