Multinational Financial Management Alan Shapiro 9th Edition J.

Wiley & Sons

Power Points by Joseph F. Greco, Ph.D. California State University, Fullerton

CHAPTER 6
Country Risk Analysis

THE MEASUREMENT OF POLITICAL RISK

I. MEASURING POLITICAL RISK
A. Country-specific perspective focuses on the country from a top-down view, i.e. macroeconomic variables to industry-specific analysis

THE MEASUREMENT OF POLITICAL RISK

B. Political Stability
1. Measured by: a. Frequency of government changes b. Level of violence c. Number of armed insurrections d. Conflict with other states

THE MEASUREMENT OF POLITICAL RISK

C. Economic Factors
1. Indicators of political unrest a. Rampant inflation b. Balance of payment deficits c. Slowed growth of per capita GDP

THE MEASUREMENT OF POLITICAL RISK D. Subjective Factors

1. 2. Profit Opportunity Political Risk and Uncertain Property Rights

THE MEASUREMENT OF POLITICAL RISK 3. Capital Flight

a. Definition: the export of savings by a nations citizens because of safety-of-capital fears. Measurement: use the balance-of- payment account

b.

THE MEASUREMENT OF POLITICAL RISK c. Causes of capital flight

1.) 2.) 3.) Inappropriate economic policies Expectation of devaluation High political risk

ECONOMIC AND POLITICAL FACTORS

I. Economic and Political Factors
Primary focus: How well is the country doing economically? Negative factors: A. Fiscal Irresponsibility -high government deficits B. Monetary Instability C. Controlled Exchange Rate System -currency usually overvalued D. Wasteful Government Spending -inability to service foreign debt

ECONOMIC AND POLITICAL FACTORS

I. Economic and Political Factors (cont)
E. Resource Base -lack of strong work ethic F. Country Risk and Adjustment to External Shocks 1. What are the impacts of external shocks: how well a nation responds varies

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ECONOMIC AND POLITICAL FACTORS

II. Key Indicators of Country Risk
A. B. C. Relative size of government debt Money expansion Existence of governmentimposed barriers to market forces

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ECONOMIC AND POLITICAL FACTORS

II. Key Indicators of Country Risk (cont)
D. E. F. G. Level of tax rates Amount of government-owned firms Political and fiscal responsibility Amount and extent of corruption

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ECONOMIC AND POLITICAL FACTORS III. Key indicators of economic health

A. B. C. D. E. Structural incentives Legal structure Clear incentives to save Open economy Stable macroeconomic policies

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COUNTRY RISK ANALYSIS IN INTERNATIONAL BANKING

I. Country Risk and the Terms of Trade
What ultimately determines a nations ability to repay foreign loans? - the speed of adjustment

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COUNTRY RISK ANALYSIS IN INTERNATIONAL BANKING

II. The Governments Cost/Benefit Calculus

debt to wealth ratio cost of default fluctuations in the terms of trade

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COUNTRY RISK ANALYSIS IN INTERNATIONAL BANKING

III. Lessons from the International Debt Crisis of 1982
Economic reforms that work: A. Strong head of state B. Viable economic plan C. Competent economic team D. Support at the top E. Sell the program to all levels of society

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