MANAGING COUNTRY RISK

MANAGING COUNTRY RISK

1. CHAPTER 1: COUNTRY RISK IN PERSPECTIVE

   • The political and economical landscape of diverse countries in the world, have been completely changed by diverse factors, including globalization, social media, interconnectedness, and instant communication.
   • The access to information, market openness, and competitive landscapes, have benefited investors and cross-border traders, since some decades ago trading decisions were made with higher risks due to the lack of information.
   • Country risk analysis mainly rely on how numbers and theories are used to arrive to a meaningful conclusion, and for analysts it can be an overwhelming duty due to the amounts of information. It is also fundamental to understand the environment and anticipate possible outcomes.
     • A risk analysis must involve facts such as politics, economics, history, sociocultural dynamics, among many other factors. Also, it must consider unexpected events, trends and different scenarios.
       • intelligence officers use information to generate conclusions about the likely behavior of leaders, political parties, the military, and other state and non-state actors.
       • Political scientists often apply political theory to the behavior of nation-states
       • Banks tend to be skewed heavily toward plugging numbers into algorithms or spread sheets
   • RISK MANAGEMENT LESSONS
     • Anticipate when and how political changes may occur.
       • social, political, and economic factors can reach a boiling point in an instant
     • The fact that a country is larger and more important may prevent it from embracing political change.
     • What may appear to be fundamental change is not really change at all, or change for the worse.
     • In the globalized world in which we live in, political change that may have been limited in regional impact has great potential to explode in scope.
   • In order for risk analysts to stay ahead of the game, they must be able to use the past and present to try to predict the future
     • Risk perception is important and helps shape foreign investors’ behavior.
       • Including conventional wisdom, prior experience, perception and tolerance of economic and political risk, and long-term objectives.
   • FDI decisions in developing countries are determined by both political and economic factors.
   • It is essential to not take for granted that having the general political and economic information will lead to a successful investment, since we live in a very volatile era that may change in few moments and that could have a strong impact.
   • The factors that influence decision maker
     • 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 connection
     • Cost of production
     • Media attention
   • Consumer behavior is essential for determining the sucess of an in esting.
   • It is fundamental to consider both, quantitative & qualitative information for having an accurate risk analysis.
   • Lines of communication must be correctly used in order to avoid future mistakes within businesses.

2. CHAPTER 2: FOUNDATIONS OF COUNTRY RISK MANAGEMENT

   • Some mistakes that 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.
     • Agreeing to tariff, tax, or revenue sharing arrangements generate minimum conflict due to a fairness factor & minimizes operational complications
     • How political power is exercised often determines whether government action or inaction threatens a firm’s value.
   • The task of the local manager, the corporate risk manager, treasurer, or chief financial officer to identify whether a government action poses a threat to a firm’s financial well-being and then to act upon it.
   • There are diverse distinctions that must be made by risks managers:
     • Firm-specific political risks
       • Directed at a particular company and are, by nature, discriminatory, which means that the risk that a government will nullify its contract with a given firm or that a terrorist group will target the firm’s physical operations.
         • Firms may be able to reduce both the likelihood and impact of firm-specific risks by incorporating strong arbitration language into a contract or by enhancing on-site security to protect against terrorist attacks
     • Country-specific political risks
       • Risks are not directed at a firm, but rather are countrywide and may affect firm performance
         • Firms usually have little control over the impact of country-level political risks on their operations. The only sure way to avoid country-level political risks is to stop operating in the country in question.
   • POLITICAL RISKS
     • Government Risks
       • They arise from the actions of a governmental authority, whether that authority is used legally or not
         • Ex. legitimately enacted tax hike or an extortion ring
     • Instability Risks
       • Arise from political power struggle
         • Conflicts could be between members of a government fighting over succession or mass riots in response to deteriorating social conditions
     • Political and social developments that can have an impact upon the value or repatriation of foreign investment or on the repayment of cross-border lending
   • SOVEREIGN RISKS
     • Risk that a foreign central bank will alter its foreign-exchange regulations, thereby significantly reducing or completely nullifying the value of foreign-exchange contracts
   • COUNTRY RISK
     • The likelihood that a sovereign state may be unable or unwilling to fulfill its obligations toward one or more lender
   • TRANSACTIONAL RISK: the country, sovereign, political, economic, financial, technical, environmental, developmental, and sociocultural risk that an organization assumes in every international transaction in which it engages.
   • Elements of an Effective Risk Management Process
     • Effective oversight by a board of directors
       • An accurate system for reporting country exposures
         • An effective process for analyzing country risk & risk rating system
           • Regular monitoring of country conditions
             • Periodic stress testing of foreign exposures
               • Adequate internal controls and an audit function
   • Effective country risk management requires distinguishing between emerging events and trends that pose true risks, such as a well-defined threat to corporate performance, from political events that are merely dramatic.

3. Ana Teresa Garay Rodríguez // A01701459

   • Global Business Trends and Risks Detection
   • Reference: Wagner, Daniel. Managing Country Risk: A Practitioner’s Guide to Effective Cross-Border Risk Analysis CRC Press. Kindle Edition.