Lecture VII Country Risk Assessment Methodologies: the Qualitative, Structural Approach to Country Risk

Final Essay

Final Essay Structure  Country risk analysis of a particular developing country;  The paper will be 2000 words long (excluded graphs and tables);  The paper should include: data and analysis on the country’s features following Table 4.7 in Bouchet, Clark and Groslambert (2003); country rating from one rating agency (for example Coface); A discussion of the typology of investment that you would suggest to a potential client.  The essay is personal;

The Qualitative Approach A robust qualitative approach leads to comprehensive country risk report that tackles the following six elements:  Social and welfare dimension of the development strategy;  Macroeconomic fundamentals;  External indebtedness evolution, structure and burden;  Domestic financial system situation;  Assessments of the governance and transparency issues;  Evaluation of the political stability.

Governance (1)  Governance is at the hearth of the development process;  Public sector institutional reform is the heart of good governance; “Second-generation reforms” that affect the relationship between the state, the market, and the civil society; Aim at strengthening the “social- capital”: group solidarity and trust in human capital;

Governance (2)  Today, to get market access and show robust creditworthiness to rating agencies, emerging market countries must demonstrate that they adhere to high transparency and governance standards;  One key aspect of the investment climate is the assessment of: Political stability; Transparency; And efficiency of the legal and judiciary system.

Governance (3)  What is Governance? All the values that drive the regulation and ultimate finality of the exercise of power in private and public institutions:  Transparency;  Sound and efficient administration;  Government accountability for the use of public funds;  Rule of law;  Social inclusion. The ‘bug in governance’ = corruption!

Governance (4)  What is corruption? Is the abuse of public power (discretionary public preferences) for private gains (speculation, insider information, cash payment…); It involves a patron-client relationship.  Where does corruption come from? High pace of social change combined with weak institutional development  EX. Planned economy which moves toward market-driven economic policy (Vietnam, Laos, Cambodia, Albania, Ukraine, Russia etc) Economic liberalisation and public sector reform reduce the opportunities for corruption.

Governance (5)  How does corruption relate to social and economic development? (-) sub-optimal allocation of resources; (-) Distortions in resource distributions and income inequalities; (-) Discourages savings and investment; (-) Discourages foreign investment; (-) Stimulates capital flight and brain drain; (-) Increase uncertainty and causes negative expectations; (+) useful flexibility in fast-changing social and economic structure.

The Qualitative Approach A robust qualitative approach leads to comprehensive country risk report that trackle the following six elements:  Social and welfare dimension of the development strategy;  Macroeconomic fundamentals;  External indebtedness evolution, structure and burden;  Domestic financial system situation;  Assessments of the governance and transparency issues;  Evaluation of the political stability.

Political Risk  Wide range of facts: Terrorist attacks; Regulatory change; Strikes; Social unrest; NGO action;

References  Bouchet, Clark and Groslambert (2003): “Country Risk Assessment”, Wiley finance (Chapter 4).

Group Presentation Country Risk Analysis: the Rating (quantitative) Approach

Discussion  What does the different ‘Grade’ means? What’s behind them?  How can we link the rating with the risk analysis?  How can we put together the different elements of the rating methodology?  Why is the quantitative analysis necessary?