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3.10.1. Country risk analysis

When the company has cross-border transactions from the home to abroad there is uncertainty and risk higher than in home market. Even with good information with lot of figures and indicators it is difficult to make conclusions in another country than in home country market. This additional risk that appears a firm does cross-border business transaction or transaction between foreign countries is counter risk.

Obviously, companies find it important to calculate and forecast country risk and find strategies to reduce its impact. Because of globalization the value cross-border transaction market is growing. That is why the companies that want to stay competitive have to widen the activities beyond their home markets to foreign market. Most firms become exposed to country risk and want to evaluate it and reduce it.

The concept of country risk used commonly classifications of the world’s country. Such classifications reflect level of a country GDP, growth in its GDP and the structural development. They also reflect different challenges in risk assessment.

Country risk has an equally strong bearing on exporting and importing activities as well as on all contractual cross-border agreement. Country risk depend on what kind of transaction is contemplated which branch of industry is concerned, the geographical location of activities etc.

The country risk is subdivided into five components – political risk, financial risk, economic risk, social risk and transaction (micro) risk. All companies need a strategy for its cross-border market expansion. Analyses of country risks provide the business intelligence for global market expansion strategy. Sometime it is very difficult estimate the country risk there are a lot of problems for example with objective information’s but analytical efforts and critical mood always a strong platform for decision than doing nothing.

Information needed for country analysis can be produced in several ways. Hard statistical information can be found through desk research. Economic and financial information can be found in written report from several organizations for exampleу Organization for Economic Cooperation and Development (OECD), International Bank for Reconstruction and Development (IBRD), International Monetary Found (IMF) est. Specialized country risk institutions published country risk information as well as ratings and assessment of political, financial and social risk.

There are lot of methods to acquire information for example trade promotions organizations like Trade Council or Import-Export Agencies, consultation with “experts”, the Delphi technique, the scenario technique, making checklist is widely used method, and econometric models.

There are same international institutions with focus on country risk:

  • Business Environment Risk Intelligence (BERI). DERI produces Index called “Profit Opportunity Recommendations” (POR), “Political Risk Index” is based on ten political and social variables, and “Operating Risk Index” is created from 15 economic, finance and structural variables.

  • Country Risk Group (CRG). This institute makes projections based on macro risk. There are Political Risk, Security Risk, and Travel Risk.

  • Economic Intelligence Unit (EIU) have the department the “Country Risk Services”(CRS).EIU assesses a composite country risk on the basis four types of risk – political risk(22%), economic risk (28%), economic structure risk (27%), and Liquidity Risk (23%). Ratings are on a scale A-E.

  • Euromoney provides a full country risk ratings based on nine variables – economic risk (25%), political risk (25%), debt indicator (10%), debt in default (10%), credit ratings (10%), access to bank finance (5%), access to short-term finance(5%), access to capital market (5%), and discount on forfeiting (5%). Ratings are made on a 1-10 scale. Euromoney also composes a Corruption, Perception index with data from Transparency International.

  • Political Risk Services Group (PRSG) published two systems for evaluating the country risk faced by global business. PRS deals with risk related to the general business climate as to regime stability, turmoil, financial transfer, direct investment, and export. The International Country Risk Guide System (ICRS) the composite country risk index is created by dividing the sum of three by tow. Thus, formula used is:

CPFER= 0.5(PR+FR+ER) (2.10)12

CPFER - composite political, financial, and economic risk ratings.

PR – total political risk indicator

FR – total financial risk indicator

ER - total economic risk indicator

In the end, there is same useful website about country risk www.globalfindata.com, www.econ.yale.edu/~shiller, finance.yahoo.com, www.duke.edu/~charvey, www.prsgroup.com, www.economist.com, www.ebrd.com, www.worldbank.com, www.bis.org, www.aig.com.