Showing posts with label country risk. Show all posts
Showing posts with label country risk. Show all posts

Saturday, August 6, 2011

Financial Services And Country Risk

Importantly, to attract new customers, foreign banks will make their reputation in the region by addressing several areas (retail banking, asset management ...) and extending their geographical coverage, in contrast to local, often focused on a number few countries. This strategy requires a deployment capitalizing on existing settlements, focusing on synergies (sharing of customer data ...), and market knowledge already acquired with the risks, a decisive element in the investment decision.

Indeed, Central Europe in particular differs from other popular markets like China and India by showing a mainly political and economic situation almost stabilized. Of course some main regulatory obstacles remain, like the restrictions governing credit growth, to inhibit growth in net banking income. Also binding regulations set by some central banks in the region often impose bureaucratic processes. Also, banks will have to deal with financial transparency may be limited, to understand the economic health of their third example.

However, the states of Central Europe, mostly integrated into the EU, should be quickly put in line with European standards and guidelines and promote the establishment of foreign banks. Their alignment of means of payment or accounting standards is remarkable.

Still, the disparities within the region persist. Some states of Eastern Europe have large current account deficits and political instability, like the Balkans. Therefore, it is questionable whether these countries will be able to follow the path of the "leading countries" such as Slovenia, Hungary or the Czech Republic and converge to a stable market economy and conducive to the rapid emergence of financial services. From this perspective, Europe is undoubtedly a great ally.

Saturday, June 18, 2011

Country Risk Part.III

During the introduction of the Cooke ratio, depending on whether the country was a member of the OECD or not, the commitments to residents of foreign countries were weighted at 0% or 100%. A debt security issued by a government could therefore not return in the calculation of the Cooke ratio, which consequently gave an advantage to OECD countries until 1994 and the opening of the more "modest”.

As part of the Basel II regulations, the IRB approach (Internal Rating Based) implies the existence of a probability of default for counterparties. But is it really possible to speak of "default" for the country? The S & P introduced the notion moreover SD (Default Selected) to report that states do not honor their debts, since technically they cannot be made bankrupt and businesses. Of default of a country therefore requires analysis of the creditworthiness of the state. It is thus necessary to understand properly the impact of the fiscal capacity of the State concerned on its ability to repay and to define an acceptable level of debt for sovereign debt. However, these problems are more related to the concept of sovereign risk than that of country risk as a whole; demonstrate once again that the concepts are very similar.

Investing in emerging high growth is an important trend as evidenced by the proliferation of funds BRIC (Brazil, Russia, India and China). However, although the results are quite encouraging, these investments are not safe because these countries are not immune to political tensions, as their market is very volatile at times and finally as a big part of the investment is located in the energy. That's why the rating agencies are requested by the fund managers to reassure investors, the country risk analysis and must rest.

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.

Country Risk Part.I

The Mexican debt crisis in 1982 which forced the country to introduce a moratorium is one of the first and most contemporary manifestations of country risk. The concept also takes full extent over the 90 years with the crisis countries. Emerging from 1997 Asian crisis, Russian crisis in 1998 etc. Indeed, given the globalization of the economy and the succession of crises due to the expansion of capital movements in the world, economic agents and financial choices for their particular investment and acquisitions, need accurate information on the assessment of risk profiles of the countries covered.

A single definition of country risk is difficult to provide to the extent that it is a composite concept. Country risk encompasses all actual future events that may affect a financial investor in the conduct of its operations in relation to a country called "at risk". The risks mentioned are related to the state of the country, regardless of the quality of the debtor or the project.

However, if the concept is difficult to define exhaustively, his analysis is far from insurmountable. Many tools and procedures are available for players to understand this risk.

First, the concept of country risk and sovereign risk are often confused. Sovereign risk is the risk for financial institutions to see the sovereign (central government, ministries, local governments and regional ...) which they have granted loans, unwilling or unable to meet its payment obligations to them. Country risk in turn has a much broader scope because there is no concept of "sovereign", the entity in question is the entire country. The two concepts are nevertheless closely related. Indeed, as part of a scoring, note the Sovereign cannot be too far from the rating of the country, the quality of the first depends on the country's environment and the decisions of the Supreme rarely without consequence on the functioning economy.