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Country Risk Analysis - Essay Example

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Country Risk Analysis

The methods used by the largest and most famous investment institutions are also in the focus. The Democratic Republic of Congo (DRC) is taken to exemplify the categories and methods discussed. In the World Factbook we find that "the economy of the Democratic Republic of the Congo has declined drastically since the mid-1980s. The war, which began in August 1998, dramatically reduced national output and government revenue, increased external debt, and resulted in the deaths of perhaps 3.5 million people from violence, famine, and disease. Foreign businesses curtailed operations due to uncertainty about the outcome of the conflict, lack of infrastructure, and the difficult operating environment. Conditions improved in late 2002 with the withdrawal of a large portion of the invading foreign troops. The transitional government has reopened relations with international financial institutions and international donors, and President KABILA has begun implementing reforms. Much economic activity lies outside the GDP data. Economic stability improved in 2003-05, although an uncertain legal framework, corruption, and a lack of openness in government policy continues to hamper growth" (The World Factbook).
According to some experts in CRA, country risks can be divided into some precise categories. In the consulted sources six categories can be found. They are as follows: economic, transfer, exchange rate, location, sovereign and political risks (Meldrum, 2000, p.2). These categories do not stand apart from each other, but are closely interrelated due to the specifics of a domestic economy.
The economic risk is closely connected to the overall economic policy of the country, that is, its fiscal or monetary policies interrelating with such nationally important factors of wealth distribution or industry decline. This type of risk goes hand by hand with political risks. The transfer risk is caused merely by the local government, which restricts the movement of foreign capitals. In such a way, it becomes extremely difficult to repatriate capitals (profits, dividends, etc.). The exchange risk includes unexpected changes in local currency rates. It may be due to sudden changes in the currency regime of the country. The location risk include all undesirable effects provoked by armed conflicts, disturbances, etc. existent in the region, in which the country is situated. The presence of such hotbeds may be contagious and may spill over the country. The sovereign risk includes a government's loan obligations. It may be cause of a number of factors such as a government's unwillingness to comply with loan obligations; shortage of foreign exchange due to unfavorable developments in its balance of payments (Nath, 2004, p.3). he political risk includes all changes influenced by new policies imposed by a government. This type of risks covers the potential for conflicts, political upheavals and coup d'tat (Meldrum, 2000, p.4).
The leading investment institutions and agencies have developed their own country risk methods.
Economist Intelligence Unit:
The country risk analysis is carried out for 150 countries and it is based on 4 components, which are: the political risk (22% of the overall weight; the political risk includes 11 indicators); the economic risk (28%; 27 variables); economic-structural risk (27%; 28 variables) and liquidity risk (23%; 10 variables). The results are rated ...Show more


Doing business abroad implies some degree of risk. Business transactions across international boarders are riskier than domestic transactions. Experts name these "additional" risks as country risks, which, as Meldrum mentions, "arise from a variety of national differences in economic structures, policies, socio-political institutions, geography, and currencies" (Meldrum, 2000)…
Author : bmclaughlin
Country Risk Analysis essay example
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