1 Multinational Financial Management Alan Shapiro 10 th Edition John Wiley & Sons, Inc. PowerPoints by Joseph F. Greco, Ph.D. California State University, Fullerton

Country Risk Analysis CHAPTER 6

THE MEASUREMENT OF POLITICAL RISK I.MEASURING POLITICAL RISK A.Country-specific perspective focuses on the country from a “top-down” view, i.e. macroeconomic variables to industry- specific analysis 3

THE MEASUREMENT OF POLITICAL RISK B.Political Stability 1. Measured by: a.Frequency of government changes b.Level of violence c.Number of armed insurrections d.Conflict with other states 4

THE MEASUREMENT OF POLITICAL RISK C.Economic Factors 1.Indicators of political unrest a.Rampant inflation b.Balance of payment deficits c.Slowed growth of per capita GDP 5

THE MEASUREMENT OF POLITICAL RISK D.Subjective Factors 1.Profit Opportunity 2.Political Risk and Uncertain Property Rights 6

THE MEASUREMENT OF POLITICAL RISK 3.Capital Flight a.Definition: the export of savings by a nation’s citizens because of safety-of-capital fears. b.Measurement: use the balance-of- payment account 7

THE MEASUREMENT OF POLITICAL RISK c.Causes of capital flight 1.)Inappropriate economic policies 2.)Expectation of devaluation 3.)High political risk 8

ECONOMIC AND POLITICAL FACTORS I.Economic and Political Factors Primary focus: How well is the country doing economically? Negative factors: A. Fiscal Irresponsibility -high government deficits B. Monetary Instability C. Controlled Exchange Rate System -currency usually overvalued D. Wasteful Government Spending -inability to service foreign debt 9

ECONOMIC AND POLITICAL FACTORS I. Economic and Political Factors (con’t) E.Resource Base -lack of strong work ethic F.Country Risk and Adjustment to External Shocks 1.What are the impacts of external shocks? how well a nation responds varies 10

ECONOMIC AND POLITICAL FACTORS II. Key Indicators of Country Risk A.Relative size of government debt B.Money expansion C.Existence of government-imposed barriers to market forces 11

ECONOMIC AND POLITICAL FACTORS II. Key Indicators of Country Risk (con’t) D.Level of tax rates E.Amount of government-owned firms F.Political and fiscal responsibility G.Amount and extent of corruption 12

ECONOMIC AND POLITICAL FACTORS III. Key indicators of economic health A. Structural incentives B.Legal structure C.Clear incentives to save D.Open economy E.Stable macroeconomic policies 13

COUNTRY RISK ANALYSIS IN INTERNATIONAL BANKING I. Country Risk and the Terms of Trade What ultimately determines a nation’s ability to repay foreign loans? - the speed of adjustment 14

COUNTRY RISK ANALYSIS IN INTERNATIONAL BANKING II. The Government’s Cost/Benefit Calculus debt to wealth ratio cost of default fluctuations in the terms of trade 15

COUNTRY RISK ANALYSIS IN INTERNATIONAL BANKING III. Lessons from the International Debt Crisis of 1982 Economic reforms that work that have: A. Strong head of state B. Viable economic plan C. Competent economic team D. Support “at the top” E. Sell the program to all levels of society 16

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