“Country risk is exposure to a loss incross-border lending, caused by the events in aparticular country. These events must be, at least tosome extent, under the control of the governmentof that country; they are definitely not under thecontrol of a private enterprise or individual.”
All cross border lending in a country whether to the government, a bank, a private enterprise or an individual is exposed to country risk. In case of natural calamities if they are unforeseeable they can not be considered as country risks.
The most frequent events that can lead to the materialization of country risk can be classified as:1. Political components2. Socio-cultural components3. Economic components
Once a particular risk has been identified there are considerable differences in the options of a lender and direct investor. If there is a risk that the government of the host country will introduce legislation to prevent temporary redundancies, the project can be re- designed to sub-contract part of the work.
1. Conceptual awareness2. Analytical ability3. In-depth knowledge4. Specialized expertise5. Familiarity with economic forecasting techniques6. Experience and skills
Balance sheet Assets Geographically Within each country Regarding country risk Each type of borrower Degree of risk
Repudiation or default Renegotiation Rescheduling or moratorium Technical default Transfer risk Geographical location of risk
Political risk analysis can be done through hedging strategies; Hedging strategies are sub-divided into two:1. Before investing internal hedging external hedging2. After investing internal hedging external hedging
Before investing: 1. Internal hedging:- A. Minimization of local equity -- Local borrowing -- Local equity -- Management contract B. International integration: ---Production integration ---Marketing integration ---International supply sourcing
2. External hedging: --- Government insurance ----Private insurance --- Host government guarantees After investing: ( A. ) Internal hedging:- 1. Good citizen policy * Prompt response to both the letter and spirit of host government * Contribution to national goals
* Contribution to national welfare * Developing a corporate image 2. Increase in technical contribution 3. Negotiation and arbitration AFTER INVESTING:- (B.) External hedging:- 1. Private insurance 2. International investment codes 3. Divestment