1. Country Risk Analysis Chapter 11

2. In this Chapter • MEASURING POLITICAL RISK • ECONOMIC AND POLITICAL FACTORS • KEY INDICATORS OF ECONOMIC HEALTH • MANAGING POLITICAL RISK

3. Government Actions Causing Political Risk • Confiscation • Expropriation • Embargo • Protective tariffs • Currency controls

4. THE MEASUREMENT OF POLITICAL RISK • I. MEASURING POLITICAL RISK • Two Perspectives: • A. Country-specific • B. Industry-specific

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

6. THE MEASUREMENT OF POLITICAL RISK • D. Economic Factors • 1. Indicators of political unrest • a. Rampant inflation • b. Extreme balance of payment deficits • c. Slowed growth of per capita GDP

7. THE MEASUREMENT OF POLITICAL RISK • E. Subjective Factors • 1. Profit Opportunity Recommendation • 2. Political Risk and Uncertain Property Rights

8. THE MEASUREMENT OF POLITICAL RISK • CAPITAL FLIGHT • Definition • Measurement • Causes

9. THE MEASUREMENT OF POLITICAL RISK • 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

10. b. Measurement: use the • balance-of- payment account Current Account Capital Account

11. THE MEASUREMENT OF POLITICAL RISK • c. Causes of capital flight • 1.) Expectation of currency depreciation 2.) Inappropriate economic policies • 3.) High political risk • Example: Latin America in the 1980’s

12. THE MEASUREMENT OF POLITICAL RISK • D. Other Factors • 1. Relative size of government debt • 2. Rate of money supply expansion • 3. Existence of government- imposed barriers to market forces

13. COUNTRY RISK ANALYSIS • Primary focus: How well is the country doing economically?

14. II. ECONOMIC AND POLITICAL FACTORS • A. Fiscal Responsibility • -high government deficits

15. Economic and Political Factors • B. Monetary Stability • ΔMS > ΔMD • C. Freely-floating versus • Controlled Exchange Rate System • -currency usually overvalued • when currency is pegged.

16. Economic and Political Factors • D. Government Spending • - Wasteful = inability to service foreign debt • E. Resource Base • -lack of strong work ethic

17. III. Key indicators of economic health • 1. Structural incentives • 2. Legal structure • 3. Clear incentives to save • 4. Open economy (globally) • 5. Stable macroeconomic policies

18. Key Indicators of Economic Health • 6. Level of tax rates • 7. amount of government-owned firms • 8. Political and fiscal responsibility • 9. Amount and extent of corruption

19. IV. Managing Political Risk • How to Avoid Confiscation? • A. Pre-investment Planning • 1. Avoidance • 2. Insurance • 3. Structuring the investment

20. Managing Political Risk • B. Operating Policies: • Develop local stakeholders