Country Risk Analysis pdf

Country Risk Analysis: Performing Due Diligence on a Country Before Entering the Market

Purpose of Country Risk Analysis

• Determine risk of entering a foreign market.

• Conduct due diligence similar to company assessments.

• Three levels: Political, Economic, and Operational Risk Analysis.

Why Banks/Lenders Perform Country Risk Analysis

• Establish risk premium (commercial rate + country-specific risk).

• Determine maximum exposure (lending limits).

• Manage loan repayments to allow new funding.

Political Risk Analysis

• Purpose: Minimize financial loss through risk identification.

• Data Sources: Personal contacts, government reports, NGOs.

• Examples: War, coups, national elections; potential economic disruption, asset damage, nationalization.

• Domestic Forces: Government type, political factions, military influence.

Economic Risk Analysis

• Relevant factors: GDP growth (ideal: 2%), purchasing power, exchange rates.

• Maintain inflation rates below 2%.

• Measures of Development: UN Human Development Index metrics (literacy, healthcare access, life expectancy).

Operational Risk

• Definition: Risks to employees/property in host countries.

• Examples: Expropriation (e.g., Venezuela), natural disasters, hostage situations, gender restrictions.

Geopolitical Risk

• Definition: Risks from wars, terrorism, and tensions affecting market conditions.

• Further reading: Matteo Iacoviello's Geopolitical Risk Paper.