Saturday, June 18, 2011
Country Risk Part.II
Country risk is actually a combination of a multitude of risks influenced by three types of factors:
* Economic and financial factors (banking systems failing, unstable tax system, poor management of public finances ...)
* The political (legitimacy of governments, political repression, censorship, ...)
* (Socio-cultural attitudes and traditions, unequal access to resources ...)
The diagram below provides a framework for country risk analysis, the aim being to understand that country risk can be approached through a large and varied risk factors (both domestic and international).
What are the measurement tools available to risk such a company wishing to conduct an operation of setting up abroad? Two main tools are characteristic of the analytical framework for country risk:
The rating is the most used tool in the evaluation of country risk faced by business entities that have concluded a contract on an international scale. The ratings are mechanical projection of reality on a scale of one-dimensional notation. Rating procedures use criteria (economic, financial, political, social ...) very objective to make the mechanics 'scientific'.
These are essentially specialized agencies that are responsible for developing the ratings. These institutions are in most of the rating agencies (Fitch Ratings, Political Risk Services, Moody's and Standard & Poor's), but also specialized firms (Business Environment Risk Intelligence and Economic Intelligence Unit) and financial newspapers (Institutional Investor). In Europe, such as credit insurers Coface (French Insurance Company for Foreign Trade) have a role in that country risk analysis. Indeed, COFACE is often the preferred partner of SME exporters who lack the internal resources of country risk analysis.
Anticipation instruments par excellence, the risk scenarios is another essential procedure in the analysis of country risk. They aim to make combinations of multiple risk factors (economic, political ...) in "stressful" varying characteristics and for different time horizons (short, medium and long term). Scenario results then allow investors or bankers to have a more comprehensive range of their potential gains and losses, which will influence their choice whether to launch the operation.