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Country Risk Analysis

25 Jun 2016

Country Risk Analysis


Country Risk Analysis:

How the world will look like in the future and how it looks now.


4 key characteristics of country risk analysis:

Consistent, Concise, Informative, Decisive


Guidelines for effective country risk management include:

Choose trustworthy data sources

Question government and other official statistics

Rely on experience and observation

Qualitative analysis may be more useful than quantitative analysis


Factors to be consider while measuring sovereign risk:

Political and social risk: government transparency, stability of political institutions, geopolitical risk, religious/ethnic concerns, corruption

Economic risk: Income inequality, credit availability, financial sector, labor flexibility, level of protectionism, Macroeconomic factors such as Inflation, saving & Investment, economic growth and development, fiscal and monetary policies, openness to trade and foreign investment

International security and border concerns

Understand the strengths and weakness based on analysis of all factors and moreover focus on country’s future prospects

Quantitative variables to consider when assessing country risk:

Economic openness, Monetary stability, Fiscal Balance, Import/Export restrictions, National Debt, Natural Disasters, Corruption, Labor unrest, Poverty, Income, Political competition/Regularity of elections, Migration, Currency volatility, Legal/regulatory risk – central bank indepence, judiciary independence, sancity of contracts,and Foreign ownership restriction level, Intellectual property protection, Supply Interruption

Country Risk measures and Indices:

Corruption Perceptions Index, Democracy Index, Freedom in the world survey, Gini Coefficent, Global Peace Index, Human Development Index and Youth Employment

Sovereign Credit Default Swaps:

SCDS are basically insurance contracts in which the  purchaser of SCDS makes fee payments to the seller of SCDS in exchange for protection from losses on sovereign debt in case of credit event i.e default, restructuring. It fulfils important market functions for hedging, speculating, basis trading of sovereign credit risk.

Factors that drive SCDS spread:

Economic Factors such as government debt, GDP growth, foreign reserves

Market Microstructure factors such as trading volume and bid ask spreads

General financial market conditions

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