Country risk
Country risk refers to the specific risks of loss in foreign trade, where a creditor or contractor is exposed, such as from exports or from financial products from banks that threaten the enforcement of claims against foreign contractors and the use of capital and anticipated profits. Crisis situations can force a country to skip agreed interest and principal payments of the state itself or dortiger debtor in whole or in part. This includes the lack of fulfillment of obligations under all kinds of securities or derivatives.
- 3.1 Target
- 3.2 Analysis of Country Risk
- 3.3 Criteria for assessing countries 3.3.1 degree of freedom
- 3.3.2 Basic requirements
- 3.3.3 General economic conditions, including trends
General
As with any default and credit risk, drop the individual criteria, the subjectively recognizes a creditor as risk factors, even when country risk differently from. Both the choice of criteria and their weighting may be different depending on the creditor. However, it can be found in common, to be presented below.
Concept of country risk
A distinction here is between the original country risk, in which the respective State 's direct payer and the derivative of country risk in which a borrower within a state of the debtor. This distinction is important because the original country risk with the individual borrower risks in the same country negatively correlated. Starting from a global definition of the term, such as of the Bank for International Settlements ( BIS) used an interoperable term can then be derived by decreasing abstraction. For the BIS, the country risk "refers to the possibility that sovereign borrowers in a particular country are not able or willing, and that other borrowers are not able, for reasons other than the normal risks associated with each lending arise to fulfill their international obligations. " For the German Bank AG Country risk is " the risk that arises due to a loss of political and social upheaval, nationalization and expropriation of assets, government repudiation of external debts by currency controls or a devaluation of the national currency in any country ." All definitions have in common that are to be detected with the country risk only those risks that are not related to the credit risk of a foreign debtor, but generally result from economic and / or political situation of the country in which the debtor has its registered office.
Originary country risk
From this definition, economic, political and stop transfer components of country risk can be derived. There is broad agreement with creditors in the fact that initially only the foreign currency liabilities of a State, but not debt in domestic currency, should be considered. This is based on the consideration that a state has its own currency autonomously by money creation ( almost ad infinitum ) can produce, while it only limited foreign currency reserves are available.
Then there is the sovereign risk to the risk that a state has its own foreign currency liabilities can not use because the government or central bank
- No foreign currency loans on the international credit markets receive and / or
- That there has been a dramatic price decline of the domestic currency, which prevents the state from applying the necessary domestic currency, which would be required for the corresponding purchase of foreign currency.
Derivatives country risk
If the state is not even the direct debtor, but a borrower from that State, the definition must be even extended to a two-dimensional variant. Because past experience has shown that creditworthy borrowers who were prevented in a financially unsound state on the repayment of their debts by the state government or central bank (negative correlation). From all this, the following definition of country risk can then be derived.
When country risk is the risk that a debtor's foreign currency liabilities can not use because
- Despite adequate credit, no foreign currency loans on the international credit markets receive and / or
- That there has been a dramatic price decline of the domestic currency, a substantial proportion of the debtor that State is striving to create the necessary domestic currency, which would be required for the corresponding purchase of foreign currency.
In a further step, the liabilities must now be included in the local currency, because these can be subject to political risk and / or a stop transfer risk.
Country risk analysis and country rating
Country risk analysis is the analysis of the risk of a financial investment in a particular state, which ends with a sovereign rating. It is an early warning system, the opportunities and risks in a particular foreign market studied, composed by the political situation of this country and its social, economic and legal environment as well as predictable or expected future developments. This analysis is carried out by international rating agencies, international financial institutions, export credit agencies and special organizations.
Target
The analysis of country risk aims to make the probability of default of a foreign investment, a credit to foreign borrowers or export financing transparent. The probability of failure is due to repayment risk associated with the ability to pay and the willingness to pay of a concrete state. The analysis is thus technically as an analysis of the creditworthiness of a borrower organized, but beyond even take into account other criteria that are typical for the assessment of credit risks at the state level. This ultimately lead to a sovereign rating, which aims classification of countries ranked in order of their relative creditworthiness, with the possibility of ordinal comparability.
Prior to the analysis of country risk risk-related, state specific criteria have to be identified that are relevant to the assessment of country risk typical and important.
Analysis of country risk
As sovereign risks are not objectively determinable sizes, and not directly observable, must be sought stable relations between observable risk -causing and representative sizes. Here, between qualitative ( political situation ) and quantitative risk factors must be distinguished ( economic outcomes). The country risk analysis first requires a retrospective view, the risk causes uncover tried and reveals the cause-effect relationships. Are then derived to forecast the factors and indicators of prognosis determined to go the next step to a cause-related and future- oriented risk assessment.
Against the background of these requirements certain political information and basic economic data of each State to be meaningful and representative summarized metrics that then with a comparison value ( benchmark ) are confronted. In addition to the rating agencies and international banks in particular three NGO - business condense these metrics to a rating or index.
- Here, two global indices have been established, the BERI index ( Business Environment Risk Index ) and the Peren -Clement- index. In business practice, the Peren -Clement- index has been established, because it takes into account explicitly in contrast to beri- index decision significant knock-out variables.
- A country ranking are "Institutional Investor" out since 1979, which summarizes the countries by continent.
Compare all countries can be with each other in their sequence but also the key figures of the country in its historical development.
Criteria for assessing countries
In the consideration of the examined foreign market characteristics are included, which can be divided into three groups there in terms of entrepreneurial activity.
Degree of freedom
- Limitations on foreign investment
- Freedom of economic order
- Accessibility of the domestic capital market to foreigners
- Liberality of the capital transfer regulations
- Requirements for investments
- Offer of employment for foreign workers
- Legal security in the country
- Export opportunities
- Import policy
Basic requirements
- Working environment, social peace
- Transport and communication system
- Brand and product protection
- Gross national product per capita of the population, possibly industry-specific market volume
- Stability of the political system ( including the risk of internal and external conflicts)
- Availability of energy
- Environmental regulations
- State as a business partner
General economic conditions, including trends
- Inflation in the past ( two) years
- Trends in the balance of payments ( including international solvency )
- Growth in the past five years and growth forecast
- Impacts of oil and energy imports
- Convertibility of the national currency
Importance
Due to the increasing economic and organizational links between the countries worldwide assessment and evaluation of country risk has become increasingly important. In particular, the financial crisis from 2007 and their impact on country risk has become more volatile (such as Iceland or emerging markets) shows the need for a sound and functioning, reflecting the reality of country risk analysis. This instrument provides guidance on the question of which foreign markets to possibly be able to offer additional business engagements or whether the nature and extent of existing commitments may be increased or should be decreased.
Country risk premium
The country risk premium is the interest rate premium on loans or bonds, resulting in the market because of the additional country-specific risks in the country of the debtor. It is from the perspective of the creditor to a risk premium.
The levels of country risk premium depends on the stability and solvency of the country. This is calculated using ratings, which are determined by credit rating organizations. Here are some of the most important of the U.S. organizations Fitch Ratings, Moody 's and Standard & Poor's.
To put it simply gives the country rating, based on the premium, the probability that an investor will suffer a loss when it invests in a particular country. Both the public and the private sector is taken into account. To obtain the index are collected various risk factors that are based on the general situation of the economy, political stability and social and the international situation.
The premium is shown in points, while each is 100 points an interest charge of 1%. Historically, rarely reaches values of more than 1500 points, the previous record set in Argentina country risk index EMBI (an index specifically for emerging markets) with more than 7,000 basis points. (see also Argentine crisis )