The Basics of Country Risk Analysis

Résumé du document

The economic history is full of errors in country risk analysis, the Russian bonds were issued before the revolution of 1917 (PBS) in 1996 it was the East Asian Miracle and in 1997, the Asian financial crisis (Indonesia - PBS)Thailand. LTCM is a private fund with a Nobel prize which went bankrupted in 1998 –(PBS). Argentina in the 1990s had the model of student of the IMF.

Objective of this course is to understand the importance of country risk analysis. Internationalization of the economies is a structural trend, Americans drive cars made in Germany, use VCR's made in Japan and wear clothing made in China. Japanese watch American movies, Egyptians drink American cola and Swedes jog in American running shoes. The world economy is more integrated than ever before.

Extraits

[...] Harvey "Country Risk Assessment: A Guide to Global Investment Strategy" (The Wiley Finance Series) by Michel Henry Bouchet, Ephraim Clarke and Bertrand Groslambert Untitled-2.jpg www.thebenche.com www.coface.fr Untitled-2.jpg "Country Risk Evaluation: Methods and Applications" (Springer Optimization and Its Applications) by Kyriaki Kosmidou, Michael Doumpos and Constantin Zopounidis "Country Analysis" by David M. [...]

[...] In 1999, Brazil had an current account deficit of of GDP, which could considered reasonable. But, it meant a current account deficit of 35 billion dollars, that had to be financed Untitled-2.jpg The analyst has to look at the dynamic of foreign trade : a current account deficit can become unsustainable very quickly and the real data will be published after the crisis The financial account gives the opportunity to understand how does this economy finance itself. Is-it stable ? [...]

[...] The size of a country and its openness can explain the behaviour of a lot of variables : growth, inflation, impact of foreign investment, etc. The size of a country will determine if this country will be influenced by capital movements Untitled-2.jpg One could also imagine that a big country will be supported by the international community in case of difficulties (“too big to fail” – China today Then, it is essential to make a first assessment in terms of solvency and liquidity Untitled-2.jpg Average (1996-2005) Untitled-2.jpg Data Human Development Report (HDR) World Bank IMF National Statistical Agencies, Central Banks Untitled-2.jpg Phase II – The Human environment The demography and the indicators of development A risk study starts by defining the level of potential growth of a country The demographic and human development indicators are the main elements of the human capital Example : Eastern Europe with an aging demography will never reach the average growth rates of Asia. [...]

[...] Is the government able to respect its international commitments ? In a federal state, do the local states co-operate with the federal government ? Untitled-2.jpg The revenues : To anticipate public finance crisis For the raw material producers, the revenues are highly volatile and dependant of a few commodities (oil, etc.) a lack of state legitimacy leads to a narrow and volatile tax base Untitled-2.jpg Data transparency is weak : a lot of budgets are voted based on “too optimistic” assumptions (projected revenues from privatisation, projected oil revenues, etc.). [...]

[...] What is the impact on growth ? A high unemployment rate and a low employment rate put constraints on short term growth Untitled-2.jpg The study of the unemployment rate of an emerging country must be connected to its stage of development. A high rate of unemployment can reflect a rationalization and modernization of the economy and a low rate a lack of reform Untitled-2.jpg Wealth, inequality and redistribution Indicators of wealth per capita are useful for a comparative study. [...]