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    Country Risk Analysis

    Nikhil D. AdhavMBA 2nd Year

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    What is Country Risk? Country risk refers to the risk of investing in a country, dependent

    on changes in the business environment that may adversely

    affect operating profits or the value of assets in a specific country.

    This risk includes

    Political risk

    Exchange rate risk

    Economic risk

    Sovereign risk

    Transfer risk


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    Country riskThis risk varies from one country to another. Some countries

    have high enough risk to discourage much foreign


    Risk of capital being locked up.

    Can reduce expected rate of returns and must be taken

    under consideration when investing abroad.

    Country risk is higher with longer term investments and

    direct investments, which are investments not made

    through a regulated market or exchange.

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    Sources of country risk

    Macro Risk

    Affects all firms in the host country.

    Micro Risk

    Specific to an industry, firm or project in a country.

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    Country Risk RatingsRank Country Pre-crisis score Sept 2011 score

    1 Indonesia 73.2 58.2

    2 Greece 82.7 40.6

    3 Malaysia 84.5 66.6

    4 Russia 50.7 56.95 Ireland 92.4 60.8

    6 Argentina 53.8 43.7

    7 Thailand 82.1 61.7

    8 South Korea 85.0 73.3

    9 Portugal 83.0 55.9

    10 Spain 86.6 66.0

    Source: Euromoney Country risk September 2011

    Score out of 100
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    Reliable rating agencies

    International Monetary Fund

    The World Bank

    Standard`s & Poor`s


    Economist Intelligence Unit

    Political Risk Services

    Business Environmental Risk Intelligence

    Control Risks information services International banks and other institutions

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    Strategies for managing

    the country risk

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    1. Negotiate the environment with host country

    The investment environment

    o Taxes

    o Labor issues

    o Concessions

    o Obligations and restrictions

    o International arbitration of disputes

    The financial environment

    o Cash flow remittance

    o Access to capital market

    o Subsidize financing

    o Corporate governance environment.

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    2. Structure foreign operations to minimizecountry risk while maximizing returns

    Limit the scope of technology transfer to foreign affiliates to include only

    non- essential parts of the production process.

    Limit dependence on the single partner.

    Enlist local partners.

    Use more stringent investment criterion.

    Plan for disaster recovery.

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    3. Obtain political risk insurance

    Insurable risk`s are

    Loss is identifiable in time, place, cause and amount.

    A large number of individuals or business are exposed to risks.

    The expected loss over the life of contract is estimable, so that

    reasonable premiums can be set by the insurer.

    Loss is outside the influence of the insured.

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