Multinational Financial

Management
Alan Shapiro
9th Edition
J.Wiley & Sons

Power Points by
Joseph F. Greco, Ph.D.
California State University, Fullerton

CHAPTER 6
Analyzing Country Risk

THE MEASUREMENT OF POLITICAL RISK

I. MEASURING POLITICAL RISK
A. Country-specific perspective
focuses on the country from a top-down view,
i.e. macroeconomic variables to industry-specific
analysis

THE MEASUREMENT OF POLITICAL RISK

B. Political Stability
1. Measured by:
a.
Frequency of government
changes
b.
Level of violence
c.
Number of armed
insurrections
d.
Conflict with other states

THE MEASUREMENT OF POLITICAL RISK

C.

Economic Factors
1. Indicators of political
unrest
a. Rampant inflation
b. Balance of payment
deficits
c. Slowed growth of per
capita GDP

THE MEASUREMENT OF POLITICAL

RISK
D.

Subjective Factors
1.
2.

Profit Opportunity
Political Risk and Uncertain
Property Rights

THE MEASUREMENT OF POLITICAL

RISK
3. Capital Flight
a.

b.

Definition:
the export of savings by a
nations citizens because of
safety-of-capital fears.
Measurement: use the
balance-of- payment account

THE MEASUREMENT OF POLITICAL

RISK
c. Causes of capital flight
1.)
2.)
3.)

Inappropriate economic policies

Expectation of devaluation
High political risk

ECONOMIC AND POLITICAL FACTORS

I. Economic and Political Factors

Primary focus: How well is the country doing

economically?
Negative factors:
A. Fiscal Irresponsibility
-high government deficits
B. Monetary Instability
C. Controlled Exchange Rate System
-currency usually overvalued
D. Wasteful Government Spending
-inability to service foreign debt

ECONOMIC AND POLITICAL FACTORS

I. Economic and Political Factors (cont)
E. Resource Base
-lack of strong work ethic
F. Country Risk and Adjustment to External Shocks
1.
What are the impacts of
external shocks:
how well a nation responds varies

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ECONOMIC AND POLITICAL FACTORS

II. Key Indicators of Country Risk
A.
B.
C.

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Relative size of government

debt
Money expansion
Existence of governmentimposed barriers to market forces

ECONOMIC AND POLITICAL FACTORS

II. Key Indicators of Country Risk (cont)
D.
E.
F.
G.

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Level of tax rates

Amount of government-owned firms
Political and fiscal responsibility
Amount and extent of corruption

ECONOMIC AND POLITICAL FACTORS

III. Key indicators of economic health
A.
B.
C.
D.
E.

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Structural incentives
Legal structure
Clear incentives to save
Open economy
Stable macroeconomic
policies

COUNTRY RISK ANALYSIS IN

INTERNATIONAL BANKING
I. Country Risk and the Terms of Trade
What ultimately determines a nations ability to
repay foreign loans?
- the speed of adjustment

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COUNTRY RISK ANALYSIS IN

INTERNATIONAL BANKING
II. The Governments Cost/Benefit Calculus

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debt to wealth ratio

cost of default
fluctuations in the terms of trade

COUNTRY RISK ANALYSIS IN

INTERNATIONAL BANKING
III. Lessons from the International Debt Crisis
of 1982
Economic reforms that work:
A. Strong head of state
B. Viable economic plan
C. Competent economic team
D. Support at the top
E. Sell the program to all levels of society

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