Managing Country Risk

Managing Country Risk

1. Country Risk in Perspective

   • In 1988 and even in earlier 2001, trade and investment decisions were based on less available information and less sophisticated means of assessing and managing risk. Today, cross-border traders and investors benefit from access to information, more open markets, and a more competitive landscape.
     • A country risk analysis considers politics, economics, sociocultural dynamics, and history. Due consideration must be given to scenarios, unexpected events, and short- and long-term trends.
       • Political change may be expected in any country at some point in time as a result of fundamental socioeconomic disparities, high levels of corruption, rumblings in the military, or the actions of a neighboring government, the ability to anticipate when and how such change may occur presents a daunting task.
         • Social, political, and economic disenfranchisement can reach a boiling point in an instant, given the right circumstances. Athough an analyst may expect that political change is likely to erupt from a larger, more important country in a given region, the fact that a country is larger and more important may prevent it from embracing political change
           • Today’s linked-in, globalized world, political change that may have been limited in regional impact has great potential to explode in scope.

2. Unexpected events are pretty likely to occur and impact foreign policies of most of the world's major governments

   • Risks analysts must excel in being able to use the past and present to try to predict the future, if they want to stay ahead of the game.
     • Risk perception depends on conventional wisdom, prior experience, perceptions, and tolerance of economic and political risks, and long-term objectives, among many others.
       • Sometimes foreign investor sentiment is often not dictated by common sense. The lure of profit and desire to establish trade partnerships is often a stronger motivational force than perceived political risk is a disincentive to invest.
         • it is reasonable to conclude that FDI decisions in developing countries are determined by both political and economic factors
           • Among the factors that influence decision makers are: • Economic health of the investment destination • Difficulty associated with doing business in a given country • Existence of rule of law and good corporate governance • Existence of corporate and government connections • Level of public discord • Media attention • Cost of production
             • Experienced foreign investors may discount terrorism risk automatically because they will have had good experience or strong corporate and government relationships locally.
               • Country risk management is a function of where one invests, in what sectors, and in what manner.
                 • When economic volatility is high and many financial professionals have little more than a quarterly orientation to the future, it is important to consider what may happen 5 or 10 years from now, not rely only with the general information

3. Consumer behavior and its linkage to the political process is a factor when making a cross-border investment

4. One of the biggest mistakes international investors and cross-border partnerships make is to focus on their own future net income generation rather than on what makes sense from all parties’ perspectives

   • How political power is exercised often determines whether government action—or inaction—threatens a firm’s value.
     • Political risks such as government risks and instability risks are pretty important determinated factors.
       • • Country risk broadly refers to the likelihood that a sovereign state may be unable or unwilling to fulfill its obligations toward one or more lenders.6 It involves an assessment of economic performance in the context of a country’s demand for external financing and judgments about the prospect for changes in financial returns.
         • Sovereign risk is the risk that a foreign central bank will alter its foreign-exchange regulations, thereby significantly reducing or completely nullifying the value of foreign-exchange contracts.7 It also refers to the risk of government default on a loan made to it or guaranteed by it.

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