Risk Analysis of High Risk, Medium Risk and Low Risk Countries for Investment

1. COUNTRY RISK ANALYSIS
International Finance Assignment – SIMS Weekend Batch
PRN Student Name
17020448011 Ashutosh Pandey
17020448016 Nema Buch
17020448028 Jogeshwary Dhope
17020448049 Lipi Basu
17020448090 Shubhangi Shingate
17020448092 Sonam Singh
17020448106 Vijay Ratnalikar

2. • To find out the optimum country to invest by analyzing the risks associated with each country
considered
• Before deciding to invest in a given country it is imperative to do a thorough risk analysis of that
country.
• All business transactions involves some degree of risk but when business transactions occur
across international borders , they carry additional risk called the country risk.
• The main objective is to explain and examine the impact of Country Risk subcategories(political,
economical and financial) and their components on the attractiveness of Foreign Direct
Investments(FDI).
• What is Country Risk?
• Country risk is a collection of risks associated with investing in a foreign country
• Country risk varies from one country to the next
• Some countries have high enough risk to discourage much foreign investment
• Country risk can reduce the expected return on an investment and must be taken into consideration whenever investing abroad.
Objective

3. Global Risk of Highest Concern for doing business - 2016
Source: Executive Opinion Survey 2015, World Economic Forum.

4. Major Categories of Country Risks
 Political Risk
o Linked to the stability and instability of government policies
o Explains if there is a strong chance of unwanted consequences arising from political activity
o Political risk factors can be divided into macro- and micro-risks
o Macro-risk refers to unanticipated and politically motivated environmental changes directed at all
foreign enterprises
It is not possible to avoid political risk completely
 Economical Risk
o Assess a country's current economic strengths and weaknesses
o Described as the likelihood that an investment will be affected by macroeconomic conditions
such as government regulation, exchange rates, etc
o Risk that a venture will face, due to various reasons such as alteration in economic trends or
fraudulent activities which ruin a project’s outcome
 Financial Risk
o Assesses a country’s ability to pay its way
o Measures a country’s ability to finance its official, commercial, and trade debt obligations
Economical
Financial
Political

5. Research Methodology
Indices sourced (Data Sources) from the
International Country Risk Guide (ICRG)
Financial
Component
Max
Point
Foreign Debt as a percent of GDP 10
Foreign Debt Service as a Percentage
of Exports of Goods and Services
10
Current Account as a Percentage of
Exports of Goods and Services
15
Net International Liquidity as Months
of import covers
5
Exchange rate stability as % of change 10
Economic
Component
Max
Point
GDP per head 5
Real GDP growth 10
Annual Inflation rate 10
Budget Balance as % of GDP 10
Current Account as % of GDP 15
Total 50
Political
Component
Max Point
Government Stability 12
Socioeconomic conditions 12
Investment Profile 12
Internal conflict 12
External conflict 12
Corruption 6
Military in politics 6
Religious Tensions 6
Law and Order 6
Ethnic Tensions 6
Democratic Accountability 6
Bureaucracy Quality 4
Total 100
Main Risk
Categories
No of
components
Max Value
Political 12 100
Economic 5 50
Financial 5 50
The Composite Risk Rating
CPFER (country X) = 0.5 (PR + FR + ER)
Very High Risk 00.0 to 49.9 points
High Risk 50.0 to 59.9 points
Moderate Risk 60.0 to 69.9 points
Low Risk 70.0 to 79.9 points
Very Low Risk 80.0 to 100 points

6. Countries in focus
USA – Low Risk Profile
India – Medium Risk Profile
Pakistan – High Risk Profile

7. Political Risk – A Comparative
Component USA India Pakistan
Rating Remarks Rating Remarks Rating Remarks
Government
Stability
66.67 Fairly stable government 66.67 Fairly stable government 54.17 High risk factor.
Socioeconomic
conditions
79.1 Employment, Consumer confidence is good.
Poverty is low.
45.83 Very poor. Unemployment and poverty
are high, consumer confidence is low
50 High risk with bad employment
situation and high poverty
Investment Profile 100 Contracts are adhered to, Profits repatriation
easy. Payment delays are very less
70.83 Contract Obligations, profit repatriation
has moderate level of Risk.
66.67 Moderate risks to investments
Internal conflict 87.5 There is very low internal conflict. Chances
of Civil War, Political Violence is very less
54.17 High Risk of Political violence. Large
number of separatist’s outfits.
54.17 High risk because of high internal
conflict
External conflict 83.33 Chances of external conflicts like War,
foreign pressures are very low.
75 Low chances of war or foreign
pressures.
75 Low risk as chances of war are
low.
Corruption 75 In general corruption is low. Business
dealings are generally fair
41.67 Very high Level of corruption 33.33 Very high level of corruption
Military in politics 66.67 Moderate risk of military influencing
government policies.
66.67 Moderate risk 25 Very high level of military
interference in politics
Religious Tensions 91.67 No fanatical religious organizations that can
influence policy and decision making
41.67 Very high Level of risk due to influence
of religious organizations in politics
16.67 High Level of religious influence
in governance
Law and Order 83.33 Very good Law and Order situation 75 Law and order in general is ok. Low
level of risk.
50 Very high risk (Law and order
situation)
Ethnic Tensions 83.33 Ethnic tensions are very low. People of
different races/religions nicely coexisting
41.67 Very High. Frequent fights between
different religious groups.
16.67 Very high risk. Constant conflict
between different religions/sects.
Democratic
Accountability
100 Democratic accountability is very high. A
very responsible Democracy.
100 Democratic accountability is very high
(responsible Democracy)
75 Moderate risk
Bureaucracy Quality 100 Very Less Bureaucracy. Ease of doing
business is very high.
75 With changing polices of International
Trade the risk is low.
50.0 High Level of bureaucracy

8. Economic Risk – A Comparative
Component USA India Pakistan
Rating Remarks Rating Remarks Rating Remarks
Real GDP growth 75 Low risk, GDP
growth is good
95 Shows strong GDP
growth,
opportunity for
investment
85 Strong GDP growth,
Very Low Risk for
investment
Annual Inflation rate 100 Very Low Risk,
no depletion in
investment
75 Controlled inflation 75 Controlled inflation,
Low risk
Budget Balance as %
of GDP
65 Moderate Risk,
shows over
spending
55 Overspending 40 High spending, country
under heavy debt and
hence at very high risk
Current Account as %
of GDP
70 Imports are
more than the
exports
70 India is in deficit,
currency
undervalued,
however this
means increased
exports
70 Imports exceeds
exports, currency
undervalued and
country at moderate
risk

9. Component USA India Pakistan
Rating Remarks Rating Remarks Rating Remarks
Foreign Debt as a percent of
GDP
55 High Risk 80 Very Low
Risk
80 Very Low
Risk
Foreign Debt Service as a
Percentage of Exports of
Goods and Services
75 Low Risk 100 Very Low
Risk
85 Very Low
Risk
Current Account as a
Percentage of Exports of
Goods and Services
80 Low Risk 76.7 Low Risk 80 Very Low
Risk
Net International Liquidity
as Months of import covers
0 Very High
Risk
70 Low Risk 30 Very High
Risk
Exchange rate stability as %
of change
100 Very Low
Risk
100 Very Low
Risk
100 Very Low
Risk
Financial Risk – A Comparative

10. Key Observations – USA
Political Economical Financial Composite
Actual 2016 84 39.5 35 79.3
Forecast 2017 Worst Case – 80.5
Best Case - 86.5
Worst Case – 38
Best Case - 40
Worst Case – 33.5
Best Case - 35.5
Worst Case – 76
Best Case - 81
Forecast 5 years Worst Case – 78.5
Best Case - 89.5
Worst Case – 34
Best Case - 42
Worst Case – 30
Best Case - 37
Worst Case – 71.3
Best Case - 84.3
Key Observations • New election not due in
next 3 years
• Trump unlikely to be
impeached
• Employment scenario
gradually improving
• Low social unrest
• Upper hand in external
wars
• GDP growth
improving
• Manufacturing
activities started
• Inflation uptick
• Debt continues to be
high
• Started to become
net exporter esp. for
fuel
• Taxations implication
unclear in short term
• Currency is stable
but fluctuating in
narrow band
• Debt continues to
be high
• Equity markets
improving
• Yield curve starting
to move upwards
esp. for longer term
• Continues to be a
net importer from
China
• Over all politically, economically
and financially stable outlook for
next 5 years.

11. Key Observations – India
Political Economical Financial Composite
Actual 2016 62.5 34 43 69.8
Forecast 2017 Worst Case – 55
Best Case - 66
Worst Case – 33
Best Case - 36
Worst Case – 40
Best Case - 43.5
Worst Case – 64.3
Best Case - 72.8
Forecast 5 years Worst Case – 52
Best Case - 71.5
Worst Case – 27
Best Case - 39
Worst Case – 35.5
Best Case - 45.5
Worst Case – 57.3
Best Case - 78
Key Observations • New election due by
early 2019, worst case by
end of 2018
• Current state elections
that incumbent
government may not
retain absolute majority
in centre
• Unemployment rising fast
and becoming political
issue
• Strained relations with
Pakistan & China
continues
• GDP continues to be
the fastest rising in
the world
• Fiscal deficit reducing
• Softened exports
• Persistent inflation
with upward
pressure
• Trade relations with
other countries
improving
• Currency remain
weak as compared
to US $
• Equity markets
strong with record
inflows
• Strong FOREX
reserves
• Interest rates still
persist at a higher
level affecting cost
of borrowing
• Overall strong indicators for high
growth inn longer term
• Positive governance reforms in
progress
• Consumer & business confidence
remains optimistic for longer
term

12. Key Observations – Pakistan
Political Economical Financial Composite
Actual 2016 51 34.5 40 62.8
Forecast 2017 Worst Case – 46.5
Best Case - 58
Worst Case – 33.5
Best Case - 34.5
Worst Case – 37.5
Best Case - 40
Worst Case – 58.8
Best Case - 66.5
Forecast 5 years Worst Case – 39.5
Best Case - 60
Worst Case – 26
Best Case - 37.5
Worst Case – 31.5
Best Case - 41.5
Worst Case – 48.5
Best Case - 69.5
Key Observations • Army continues to
dominate
• Right wing groups rising
in power
• Continues to have
terrorist basis which
operate against
neighbours as well as
Pakistan
• Social unrest increasing
• Political & security
uncertainties persists
• GDP rising slowly
• Higher dependence
on China and GCC
countries
• Inflation in control
with upward bias
• Scrutiny by IMF for
macroeconomic
imbalances
• High remittances
• Large fiscal and trade
account deficits
• Currency remain
weak as compared
to US $
• Equity markets on a
falling trends
• Interest rates going
higher
• Weak business
environment
• Overall political uncertainties
overshadowing potential
economic growth

13. • Medium Risk
• India
• 2016 Actual – 69.8
• Worst Case – 57.3
• Best Case - 78
• Risk Stability – 20.8
• Moody’s Rating – Baa2 – lower medium grade
• S&P Rating – BBB- Strong capacity to meet financial
commitments but somewhat susceptible to change
in circumstances and economics
• Political stability and economic reforms are still
work in progress.
• As compared to given the large size of markets and
economic factors strengthening the risk adjusted
returns continue to improve. This is reflected in the
buoyant markets with increasing inflows.
High Risk
Pakistan
2016 Actual – 62.8
Worst Case – 48.5
Best Case - 69.5
Risk Stability – 21.0
Moody’s Rating - B3 – Highly speculative
S&P Rating – B – More vulnerable to adverse
business, financial & economic conditions but
currently has the capacity to meet financial
commitments
It continues to be below investment grade
primarily due to political factors which are
major contributors to country risk.
If political scenario strengthens, then the
country holds promise for the economic growth.
In that case, risk adjusted returns are likely to
improve
Low Risk
USA
2016 Actual – 79.3
Worst Case – 71.3
Best Case - 84.3
Risk Stability – 13.0
Moody’s Rating – Aaa – Prime
S&P Rating – AA+ - Very strong capacity to meet
financial commitments
America continues to be dominant force in
global economic contributions.
It continues to be highly stable with low risk.
Incremental gains are lower because of already
developed market.
Thorough understanding of risk determines how attractive a country is for the international investments, given the fact
that the investors want to know the potential returns as compared to the risks. They would want to maximise the risk
adjusted returns on their investments.
Conclusion – Forecasted Scores & Analysis

14. Recommendations
High Risk Medium Risk Low Risk
Pakistan India USA
• Watch for political stability and make
selective and small investments in
strategically important projects only
• Investment in Infrastructure is the
best bet as the country lacks on basic
infrastructure. But the country poses
significant security threats to foreign
interests from terror organizations,
further compounded by high degree
of corruption
• Taking the CPEC route to investments
can reduce risks and guarantee
security, but may come with lot of
terms and conditions. (Red Herring)
• Evaluate the prospect for 2019
elections and progressively increase
your investments in the country in
strategic sectors
• With large internal market,
investments provide some insulation
from global shocks and business cycle
• Flagship schemes like Make in India
and Digital India are driving successful
diversification and strengthening of
Manufacturing and Digitization
• A weak banking system and
challenging business environment still
weigh on the outlook
• No change in current investment
portfolio as prospects of only modest
returns over a 5 year period.
• Dollar investments may pose risks due
to high currency volatility with ever
changing global situation & threats
• With lower corporate taxes as part
Trump administration new tax plan,
investments in new businesses is a
favorable proposition
• Investments recommended in
Energy, Manufacturing,
Transportation, Healthcare &
Agriculture

15. Bibliography
• International Country Risk Guide (PRS Group)
• World Economic Forum (WEF)
• US Bureau of Economic Analysis
• Trading Economics
• IMF
• WTO

16. Thank You!

17. BACKUP SLIDES

18. 1. POLITICAL RISK
o Government stability – Asses the government’s ability to carry out its declared program(s), and its ability to
stay in office.
o Socioeconomic conditions- Asses the socioeconomic pressures at work in society that could constrain
government action or fuel social dissatisfaction .
o Investment profile –Asses of factors affecting the risk to investment that are not covered by other political,
economic and financial risk components.
o Internal conflict - Assessment of political violence in the country and its actual or potential impact governance.
o External conflict - Assess both of the risk to the incumbent government from foreign action, ranging from
non-violent external pressure (diplomatic pressures, withholding of aid, trade restrictions, territorial disputes,
sanctions, etc) to violent external pressure (cross-border conflicts to all-out war).
o Corruption – Assess corruption within the political system of the country.
o Military in Politics – Its presence in politics reduces democratic accountability.

19. POLITICAL RISK….CONTD.
o Religious Tensions – Religious tensions may stem from the domination of society and/or governance by a
single religious group that seeks to replace civil law by religious law and to exclude other religions from the
political and/or social process. The risk involved in these situations range from inexperienced people
imposing inappropriate policies through civil dissent to civil war.
o Law and Order – Assess whether existing Laws are implemented.
o Ethnic tensions - Assess of the degree of tension within a country attributable to racial, nationality, or language
divisions.
o Democratic Accountability - Measure of how responsive government is to its people, on the basis that the less
responsive it is, the more likely it is that the government will fall, peacefully in a democratic society, but possibly
violently in a non-democratic one.
o Bureaucracy Quality - Shows the bureaucracy level in the country. The institutional strength and quality of the
bureaucracy is another shock absorber that tends to minimize revisions of policy when governments change.

20. World Political Risk

21. 2. ECONOMIC RISK
o GDP Per Head or GDP per Capita - Estimated GDP per head for a given year, converted into US dollars at the
average exchange rate for that year, expressed as a percentage of the average of the estimated total GDP of all
the countries covered by ICRG. Higher the GDP per head, Lower the Risk.
o Real GDP growth - Real economic growth rate is expressed as a percentage that shows the rate of change for
a country's GDP from one period to another, one year to the next, at constant 1990 prices, of a given country is
expressed as a percentage increase or decrease. Higher the GDP% Lower the Risk.
o Annual Inflation rate - Annual inflation, refers to the percent change of the CPI (the Consumer Price Index)
compared to the same month of the previous year. Higher the Inflation, higher the Risk.
o Budget Balance as % of GDP - Estimated central government budget balance (including grants) for a given
year in the national currency. Lower the budget balance, higher the risk.
o Current Account as % of GDP - Estimated balance on the current account of the balance of payments for a
given year, converted into US dollars at the average exchange rate for that year converted into US dollars. Lower
the Current account balance, higher the risk.

22. To GDP

23. 3. FINANCIAL RISK
o Foreign Debt as a Percentage of GDP - Estimated gross foreign debt in a given year, converted into US dollars
at the average exchange rate for that year
o Foreign Debt Service as a Percentage of Exports of Goods and Services - Estimated foreign debt service, for
a given year, is expressed as a percentage of the sum of the estimated total exports of goods and services for
that year, converted into US dollars at the average exchange rate for that year
o Current Account as a Percentage of Exports of Goods and Services - Balance of the current account of the
balance of payments for a given year, is expressed as a percentage of the sum of the estimated total exports of
goods and services for that year, both converted into US dollars at the average exchange rate for that year
o Net International Liquidity as Months of Import Cover - Total estimated official reserves for a given year,
including official holdings of gold, converted into US dollars at the free market price, but excluding the use of
IMF credits and the foreign liabilities of the monetary authorities, is divided by the average monthly
merchandise import cost, converted into US dollars at the average exchange rate for the period; provides a
comparative liquidity risk ratio that indicates how many months of imports can be financed with reserves
o Exchange Rate Stability - Appreciation or depreciation of a currency against the US dollar (against the German
mark in the case of the USA) over a calendar year or the most recent 12-month period is calculated as a
percentage change