2024 Author: Howard Calhoun | [email protected]. Last modified: 2023-12-17 10:16
Expansion of ties of the economic space contributes to the emergence of risks that are inherent in this business in a foreign country. An investor interested in the optimal placement of funds in an unfamiliar market may face an unstable political regime, corruption, defaults and other adverse events. All of these factors are country risks.
Definition
Country risk is the threat of financial losses in the course of transactions that are somehow related to international activities. It is determined by the conditions of the country's development and the degree of their influence on customers and contractors. For example, the imposition of restrictions on foreign exchange transactions may cause a delay in the fulfillment of obligations. Such a threat is especially typical for countries where the convertibility of national currencies has historically not been preserved.
Hierarchy
Country risk has two components: the ability and willingness to pay. The first is associated with commercial losses, and the second -political regime in the country. Financial costs can be both at the state level (insolvency risk) and at the company level. The second is understood that in the course of economic policy, the state can limit the transfer of capital. Political country risks provide for the possibility of losses as a result of the impact of adverse external factors in the region where funds are invested.
Methods of analysis
To reduce financial losses, various methods of assessing the situation in the country were used. The analysis was carried out immediately before the investment of funds. If the risk is high, then either the project was delayed or a "premium" was added to the cost. But the country risk assessment methods used earlier had one big drawback: they embellished the information received. Now the most popular method is Delphi. Its essence lies in the fact that first, analysts develop a system of indicators, and then involve experts who determine the weight of each factor for a particular country. The disadvantage of this approach is the subjectivity of assessments.
Modern methods
Country risk in the West is analyzed by the scoring method. It consists in a quantitative comparison of the main characteristics of different countries and the derivation of the resulting integral indicator, which takes into account all the criteria and ranks the states according to their investment attractiveness. This technique is used to build the German BERI index. It is used to assess the investment climate of 45 countries around the worldbased on 15 criteria with different weights. Each indicator is assigned a score from 0 to 4. The more points, the higher the investor's profit potential.
Fortune and the Economist analyze Eastern and Central Europe's country risks using a simplified methodology that focuses on the prospects for market reforms. The importance of the results is determined by the fact that the effective investment of capital directly depends on the intensity of transformations in countries.
Portfolio investors also use special credit ratings, on the basis of which the optimal investment object is selected. Based on the method developed by Europe magazine, the reliability of the countries of the world is assessed twice a year.
Factors
Creating a favorable investment climate is an important condition for the country's economic growth. An active inflow of capital (on the example of Russia) is hindered by such factors as:
- Lack of a stable legal framework.
- The growth of social tension due to the constant deterioration of the financial situation of the population.
- Separatist sentiments that take place in some regions of Russia.
- Corruption in certain areas.
- Undeveloped infrastructure - primarily transport, communications, telecommunications, hotel services.
Types
Country and regional risks include threats such as:
1. Refusal to recognize a debt or its further service.
2. Renegotiation: The lender will receive less money because the borrower has secured a rate cut. If, under the agreement, debt refinancing is initially offset by pen alties, then the consequences for the investor are the same as in the case of refusal to pay.
3. In the event of a rescheduling of the debt, two scenarios are possible:
- principal payments are reduced, part of the debt is written off;
- if the borrower seeks a delay in payments, the rate will not change.
4. Suspension of payments for technical reasons is temporary. The lender should have no doubt that the borrower will fulfill its obligations. The interest rate in this case remains the same.
5. Currency restrictions, when there is not enough foreign currency in the country, impose limits on transfers of funds abroad. At the state level, this threat is transformed into the risk of refusal to service the debt.
Rating
The country risk premium is determined by the yield on one country's government bonds and another country's bonds with the same maturity. As for Russia, a strong decline was observed in 1998. Then the risk increased faster than the premium for it. That is, investors not only lacked reliable information, but the markets were focused on the ratings of world agencies that missed changes in economic and political factors. The first crisis occurred a few days before the default in 1998 and immediatelyafter him.
The level of country risk has a strong impact on banks whose activities are directly related to foreign economic relations. Several factors contribute to this threat. All of them must be taken into account when analyzing the situation in a particular region.
Russia country risk
Moody's Investor Service downgraded the rating of the Russian Federation to the most speculative. While Standard &Poor's and Fitch rate a country by its readiness to repay debts, MIS takes into account the completeness of payments in the event of a default. Experts believe that the extremely negative assessment is caused by political reasons. According to the agency's forecasts, capital outflow this year will amount to $272 billion, GDP will decrease by 8.5%, and inflation will accelerate to 15%. But the Ministry of Finance claims that Russia has safely survived the strongest shock - a 50% drop in oil prices. That is why the country risk of the agency is greatly overestimated. International reserves have been accumulated that are higher than the public debt. There is also a current account surplus. The agency did not take into account these advantages. But the points were based on the fact that Russia could receive new sanctions due to unpredictable developments in Ukraine.
Consequences
Country risk assessment, on the one hand, is adequate. The external capital market is actually closed for Russia. The downgrade affects the cost of borrowing for the country. This is almost painless. However, experts worry that such a rating of the world agencywill force investment funds to zero out their investments in Russia. And even after the stabilization of the situation, it is unlikely that these capitals will quickly return to the country. The second threat is that creditors will demand early redemption of Eurobonds. The downgrade was taken into account by the market in the form of a short-term and low dollar jump to 64 rubles.
The banking sector also suffered
The downgrade of the rating led to a deterioration in the investment attractiveness of Moscow, St. Petersburg and 13 regions. The sovereign valuation of the capital and the Leningrad region was at the level of "Ba1". This is higher than that of Bashkortostan, Tatarstan, Samara, Nizhny Novgorod, Belgorod and other regions. The outlook for these regions remains negative. In addition, Russia's country risk affected credit institutions. The ratings of long-term deposits of Sberbank and VTB in rubles were downgraded to Baa3 and Ba1, and in foreign currency - to Ba1 and Ba2 with a forecast of negative changes. The same situation is observed in Alfa-Bank, Gazprombank and Rosselkhozbank.
Conclusion
Country risk is formed on the basis of a large number of external and internal factors that affect the investment attractiveness of the state. Such threats are more typical for regions in which there are restrictions on currency convertibility. In such states, there is always a currency, transfer and risk of a complete refusal to repay the debt. Therefore, before investing funds, it is necessary to conduct a thorough analysisexternal and internal factors. World rating agencies annually publish their assessments of the investment attractiveness of countries.
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