Country Risk Analysis

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GWU – IBI – MINERVA PROGRAM

COUNTRY RISK ANALYSIS

RENATO DONATELLO RIBEIRO donatello@originet.com.br

COUNTRY RISK ANALYSIS
I – INTRODUCTION II – HISTORY OF THE THEME A- Sources of data B- Rating Agencies III – METHODS OF ANALYSIS A – Methodologies B – The Basic data IV – PURPOSE OF THE ANALYSIS V – CONTENTS OF ANALYSIS A – Country history B – Country risk as a corporate risk 1. Dependency Level C – External Environment D – Ratios for economic risk evaluation 1. Domestic Side - Fiscal Policy - Monetary Policy 2. External Side E – Domestic financial system F – Conjunctural aspects G – The world`s viewpoint H – Strengthens and Weakness chart VI – RISK LEVEL AND EXPOSURE LIMITS VII – PRICING SYSTEM VIII – FOLLOW UP IX - CONCLUSIONS

I - INTRODUCTION

Creating the present country risk work emerged from the necessity of finding conclusive answers on about accepting or not some credit risks, specially those ones represented by the possibility of restriction of payment, imposed by a country. Furthermore, it is important to observe that the capacity of payment of a debtor may be deeply threatened if some macroeconomic instabilities affect its commercial environment, constraining its activity as a whole. Nowadays, such issues are getting more relevant around the world, for the so called globalization has led the countries towards economic disclosures, essential for keeping them competitive. So, an increasing number of companies are taking advantage of the external trade, which represents huge business opportunities as much as the possibility of buying products and, mainly, the development of new profitable and promising markets. The financial institutions, while financing the commercial flow among nations, are trying and taking advantages of such opportunities as well. On the other hand, out of the commercial extent, new business opportunities are realized to those ones who are interested on investing extra

values abroad through direct investments or through the stock and security markets (public and private). By the way, since the eighties, the financial markets are getting extremely more sophisticated with the introduction of several new products. Moreover, commodity and stock exchanges markets are now linked through real time connections, what makes the information faster and more efficient. So, all of them, investors, banks, and companies are trying to improve their asset returns, taking advantage of the amazing international liquidity opportunities, brought by the process of globalization. However, to some countries, such opportunities do not only mean increasing of the investment return. They also represent additional risks from the volatility intensification of returns of each implemented business decision. The concerning risks get stronger due to the country’s capital flows velocity. Under this highly sophisticated context, where the decisions are set in an effective global market, the country macroeconomic instabilities get amazing proportions as could be noticed during the crisis of Mexico, Russia, Brazil, Asia and, more recently, Turkey and Argentina. So, the international trade evolution and the investment and financial programs development as well – due to the business set up, velocity and

breadth – demand periodical improvement of risk methodology and analysis, specially the country risk ones, which are approached in this paper.

II - HISTORY OF THE THEME Since long ago, cross-border business risk has been an issue that has worried those ones who have transactions or assets to receive from foreign customers (residents in different countries). The possibility of a nonperformance has been presented during this whole period. In the seventies, the world economy was facing a relevant liquidity, plenty of dollars, most of them derived from the recycling of money earned by nations that were members of OPEC. Their strong reserves were deposited in the international banking system. At that time, the...
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