COUNTRY RISK ANALYSIS Overseas Economic Research Institute The Export-Import Bank of Korea

PRESENTATION CONTENTS Trend Overview Approaches Area Study

Country Risk Analysis Trend 1960~1970: Emergency Outbreaks (War, Coup d’Etat) => Raised concern on “Political risk” 1980~1990: Debt Default in Developing Countries => International Issue on “Country risk” 2000~ : Increased Transactions with Globalization => Risk Management of Emerging Market

Country Risk Analysis Economic Crises in Emerging Markets Trend Financial CrisisExternal Debt CrisisBanking Crisis Argentina (1982, 2001) Brazil (1982, ) Ecuador (1986, 1999) Egypt (1981, ) India (1991, 1993) Indonesia (1986, 1998) Mexico (1982, ) Nigeria (1987, 1999) Philippine (1983, 1997) Russia (1998) Turkey (1994) Venezuela (1984, 1996) Argentina (1983, 2001) Indonesia (1998) Mexico (1999) Pakistan (1983) Russia (1998) Venezuela (1985) Argentina (1989, 1995) Brazil (1987, 1990, 1994) Hungary (1991) India (1984, 1999) Indonesia ( ) Korea (1981, 1998) Mexico (1989, 1995) Nigeria (1989, 1996) Turkey (1982, 1999) Venezuela (1994, 1999)

Country Risk Analysis Major Economic Crises by Region Trend Latin AmericaSouth-East AsiaEastern Europe External Debt Crisis … Budget Deficit FDI over-Inflow Currency System Financial Crisis … Current Account Deficit Structural Weakness Liquidity Crisis … Transition Economy

Overview Definition of Country Risk “Degree of Default Risk of the Country” It covers factors to influence the default risk of the country resulting from economic deterioration, political events, currency depreciation and so on. Major Elements of Country Risk (OECD) - General Moratorium - Delay Transfer of Funds - Fluctuations in Exchange Rates - Measure or Decision to Prevent Payment - Force Majeure Country Risk Analysis

Comparison of Major CRR Agencies Overview K EximOECDS & PMoody’sEIU Premise SeoulParisNY London Duration Number Intervals FQFFQ Category

Country Risk Analysis Comparison of Its Utilization by Agency Focus to Measure (Standard & Poor’s) “ It measures the capacity and willingness of the government to pay its debt in due conditions. ” Overview ECAOECD S&P/Moody ’ s Credit Policy Exposure Management Risk Weighted Rate MPR Financing Capitals

Country Risk Analysis Country Risk Rating Systems - Fully Qualitative System Merits : Available Sufficient Report - Structured Qualitative System Merits : Easy in Comparing between Countries - Check List System Merits : Clear in Evaluating Rating - Statistical System Merits : Efficiency and Forecasting Overview

Country Risk Analysis Rating Factors by Agency Overview K EximOECD Economic Indicators External Transactions Payment Capacity Payment Experience Financial Indicators Economic Indicators Transition Indicators Economic Situation Political & Social Situation International Creditworthiness Financial Situation Government Policy Turmoil Risk Others

Country Risk Analysis Rationale Basic Information of Decision-Making for External Transactions based on the Country Risk Analysis => Credit Policy Attitude toward Markets Risk Management of Foreign Assets in light of Measure the Payment Capacity of a Borrower => Management of Risk weighted Assets Approaches

Country Risk Analysis CRAM (Country Risk Assessment Model) Mixture of Quantitative and Qualitative Operated by Qualitative Methods ( ) Introduction of Quantitative Methods (1998) Model Enhancement (2002, 2005) Developing Model Methodology… Approaches

Country Risk Analysis CRAM (Country Risk Assessment Model) Intervals: Regularly and Frequently Annual Country Risk Rating Plan Regularly: Quarterly Basis Requested Country from Credit Departments Deserved Country to be Evaluated Others Approaches

Country Risk Analysis Approaches (1) Quantitative Factors Nominal GDP Per Capita GDP Real GDP Growth Rate Inflation Budget Balance to GDP Total Domestic Investment to GDP Current Account Balance to GDP Foreign Reserves to Average Monthly Imports Total Exports Increasing Rate Total Exports to GDP Total External Debt Stocks to GDP Total External Debt Stocks to Total Exports Debt Service Ratio Short-term Debt to Foreign Reserves

Country Risk Analysis Approaches (2) Qualitative Factors Economic Situation : Structural Vulnerability, Growth Potentials, Policy Performance Political & Social Situation : Political & Social Stability, Turmoil/Events, International Relation International Creditworthiness : Willingness to Pay External Debt, Appraisal from International Markets…

Country Risk Analysis Incorporated Overall Score Overall Score = (QT Score + QL Score)/2 Individual Factors: Converted Weights into Score QT Score Discount for the Transition Economy Matched Ratings Approaches Overall Score K Exim RatingOECD Rating (90) ≥ 80 (80) ≥ 70 (70) ≥ 60 (60) ≥ 50 (50) ≥ 45 (45) ≥ 40 (40) ≥ 35 (35) ≥ 30 (10) ＜ 30 A B1 B2 C1 C2 C3 D1 D2 E 0/

Country Risk Analysis Procedure for Country Risk Classification Country Risk Evaluating Meeting Country Risk Analyzing Debate Country Risk Evaluating Committee Decision of Country Risk Rating Major Countries : Debate, Committee General Countries : Debate Approaches

Country Risk Analysis Notification of Country Risk Rating Internal Notification Customer : Credit Department… Service : Country Risk Ratings and Related Reports External Notice Service : Released Ratings since April Approaches

Country Risk Analysis Area Study Sources and MaterialsReferred Information Country Risk Agencies (S&P, Moody’s, ICRG) International Organizations (IMF, World Bank, OECD) Area Study Institutions (EIU, IIF, Economist, KIEP, KOTRA) Major Newspapers (FT, WSJ, NYT, WP) Internet and Broadcasting (Bloomberg, CNN, BBC) Overseas Representatives OECD CRE Meeting Outcome ECA Developments Local/Regional Authorities Field Survey

Country Risk Analysis Area Study K Exim OER (1982) OEIS (1997) Special Report (2000) IntervalsMonthly (Book) Frequently (Internet) Frequently (Book) Outputs Focus Regional Info. ECA… Country Paper FDI System Country Report Issue Paper Contents Current Issue Events/News Developments Main Indicators Macro Eco. Investment Info. Country Info. Industry Info.

Country Risk Analysis Country Report Objective Broad Understanding on an Available Country to Do Business in perspective of Economic Cooperation Contents Overall Information and Economic Situation, Industry, Investment and Feasible Program for the Country Background Country Risk Evaluating and Related Reports Area Study

Thank You Very Much ! Yang-Hyeon JO Country Risk Economist