INTERNATIONAL

FINANCIAL
MANAGEMENT

M ANAGE M E N T

Country Risk Analysis & Political Risk

Analysis Group 03

Presented to- MBA - FC 4TH Sem. (2019)

• Ankit Kumar Mishra

Mr.Omendra Awasthi • Akshay Singh
• A n trik sh V erma
• Ranjana Dubey
• Parul Sachan
International Financial
Management

A presentation on
“Country Risk Analysis
Political Risk Analysis ”
 Country Risk

Country risk refers to the risk of

investing or lending in a country,
arising from possible changes in the
business environment that may
adversely affect operating profits or
the value of assets in the country.
Country Risk

❑ Country Risk Analysis is

assessment of potential
risks and rewards from doing
business in country.

❑ Country risk represents

potentially adverse impact of a
country’s
environment on the cash flow of
the firm.
 Importance :

❖ Used to monitor countries where the firm is

presently engaged in international business.

❖ Used by the firm as a screening device to

avoid countries with excessive risk.

❖ Used to assess particular forms of risk for a

proposed project considered for a foreign
country.

❖ To improve the analysis used in making long

Risk Analyzed Factors

Political

Financial
Factors Subjective

Economic
Political Risk

The political risk is the risk that a

foreign government will significantly
alter its policies or other regulations so
that it significantly affects one’s
investment. More broadly, it can apply to
the risk that a nation will refuse to
comply with an agreement to which it is a
party, or that political violence will hurt
an investment or business.
TYPES OF POLITICAL RISKS:

MACRO RISK

MICRO RISK
MACRO RISK

It refers that it happens when there is a major

change in the political system of the country where
investment is being done.

Example : After the change in the government of

China in the year 1949, ruling communist party
nationalized the foreign assests in China with a very
less compensation to the investors.
MICRO RISK

It refers to the risk which affects limited sectors of

foreign investment.

Example : In 1992 , Enron spent $300 million to set

up a power plant in India but due to the change in the
ruling party of the state it affected the agreement of
the company and company would have to accept the
offer of the govt. which would result in less profits ,
so this project is still in a dispute.
THERE ARE SOME OTHER RELEVANT
POLITICAL RISK FACTORS:

Terrorist attack:-
It highly affects the country's stable economy. Example:
Recent attaks in Mumbai, India at TAJ Hotel which badly
affect the Indian stock exchange.

Blockage of fund transfers:-

A subsidiary on a foreign investor always transfer their
funds to headquarters in their home country for some
reasons, but in some cases the host country's government
can block the transfer of funds due to which the investors
have to invest the money locally which would result in
lesser profits.
War:-
There are many countries which are involved in conflicts
and are always in situation of war with their neighbouring
countries so it affects the security of the employees
recruited by the foreign companies in the host country and
it also affects the cash flow of the investor in that country.

Corruption:-
It badly affects the investor's budget and its cost of
running projects in a country as it has to bribe the
government to officials to get a contract or make some
funding to political parties.
HOW TO IDENTIFY POTENTIAL POLITICAL
RISKS
Identification is the first step to successfully managing consequences of any
political climate change .
1. Avoiding Investment
2. Adaptation
I) Local Equity and Debt
ii) Developmental Assistance
iii) Insurance
3. Threat
4. Lobbying
5. Invaluable Status
Political Risk factors

❑ Blockage of FundTransfers

❑ Attitude ofHost Government

❑ Currency Inconvertibility
Contd....
❑ Bureaucracy

❑ War

❑ Corruption

❑ Attitude of consumers in the Host Country

Economic Risk

Economic risk is the risk associated with less than

expected rates of return or performance to an
investment stemming from changes in economic
policies or growthrate.
 Economic Risk Factors
Economic risk can occur most commonly when:

❑ Economic policies change.

❑ The goals underlying economic policies change.

Cont..

❑ The market growth rate changes.

❑ An economy’s strength or advantages are

somehow compromised.
Financial Risk Factors
1) Current and Potential State of the country’s
Economy
➢ A recession can severely reduce demand.

➢ Financial distress can also cause thegovernment

to restrict MNC operations.
2) Indicators of Economic Growth –

➢ A country ‘s economic growth is dependent onseveral

financial factors – interest rates, exchange rates,
inflation etc.
Subjective Risk Factors

❖ country’s attitude towards private enterprise.

❖ Risk of currency devaluation.

❖ Risk of government’s income reduction.

❖ External flows dependence

❖ Productivity restrictions

❖ Social pressures

❖ Attitude of consumers in the host country

Types of Country Risk Assessment

❑ Macro-assessment of countryrisk

❑ Micro-assessment of countryrisk
❖ A macro-assessment of country risk is an overall
risk assessmentof a country without consideration of
the MNC’s business.

❖ A micro-assessment of country risk is the risk

assessment of a country as related to the MNC’s type
of business.
Techniques of Assessing
Country Risk

❑ A checklist approach involves rating and weighting all

the identified factors, and then consolidating the rates
and weights to produce an overall assessment.

❑ The Delphi technique involves collecting various

independent opinions and then averaging and
measuring the dispersion of those opinions
❑ Quantitative analysis techniques like regression
analysis can be applied to historical data to assess the
sensitivity of a business to various risk factors.

❑ Inspection visits involve traveling to a country and

meeting with government officials, firm executives,and/
or consumers to clarify uncertainties.
What is Capital Flight?

Types of Capital Flight:-

Capital flight can be either legal or illegal.

1. Legal
Legal capital flight usually takes the form of
repatriation of invested capital by foreign investors.
In this case, the capital outflows must be properly
reported according to existing accounting
standards and complied with the country’s laws.
2. Illegal
Conversely, illegal capital flight generally
appears in the form of illicit financial flows
(IFFS). Essentially, illicit financial flows
disappear from records within a country and
do not return to the country. Note that illegal
capital outflows are mostly associated with
countries that impose strict capital
control policies.
Causes of Capital Flight
1. Hyperinflation

2. compulsory nationalisation.

3. A balance of Payments crisis – a large

current account deficit can cause a
depreciation in the exchange rate and
create a motive for capital flight

4. Loss of confidence in the economy.

5. Fall in price of an important commodity
How to Prevent Capital Flight

The detrimental effects of capital flight

cause governments and policymakers
to develop effective methods and
strategies to prevent the occurrence of
the phenomenon. One of the methods
of preventing capital outflows is the
introduction of capital control policies.
Comparing Risk Ratings Among
Countries
❖ One approach to comparing political and financial
ratings among countries is the foreign investment
risk matrix (FIRM ).

❖ The matrix measures financial (or economic) risk on

one axis and political risk on the otheraxis.

❖ Each country can be positioned on the matrix based

on its political and financial ratings
 Indicators of High country risk :

Large government deficit relative to GNP

❑ High rate of money expansion

❑ Substantial government spending yielding

low rate of return

❑ High taxes

❑ Vast state-owned firms