国际金融市场管理Ch17CountryRiskAnalysis

Country Risk Analysis17 Chapter South-Western/Thomson Learning 2003See c16.xls for spreadsheets to accompany this chapter. C16 - 2 Chapter Objectives To identify the common factors used by MNCs to measure a countrys political risk and financial risk; To explain the techniques used to measure country risk; and To explain how the assessment of country risk is used by MNCs when making financial decisions. C16 - 3 Country Risk Analysis Country risk represents the potentially adverse impact of a countrys environment on the MNCs cash flows. C16 - 4 Country Risk Analysis Country risk can be used: to monitor countries where the MNC is presently doing business; as a screening device to avoid conducting business in countries with excessive risk; and to improve the analysis used in making long-term investment or financing decisions. C16 - 5 Political Risk Factors Attitude of Consumers in the Host Country Some consumers may be very loyal to homemade products. Attitude of Host Government The host government may impose special requirements or taxes, restrict fund transfers, subsidize local firms, or fail to enforce copyright laws. C16 - 6 Political Risk Factors Blockage of Fund Transfers Funds that are blocked may not be optimally used. Currency Inconvertibility The MNC parent may need to exchange earnings for goods. C16 - 7 War Internal and external battles, or even the threat of war, can have devastating effects. Bureaucracy Bureaucracy can complicate businesses. Corruption Corruption can increase the cost of conducting business or reduce revenue.Political Risk Factors C16 - 8 Corruption Perceptions IndexThe index, which is published by Transparency International, reflects the degree to which corruption is perceived to exist among public officials and politicians.In 2001, 91 countries are ranked on a clean score of 10.Rank Country Score1 Finland 9.93 New Zealand 9.44 Singapore 9.27 Canada 8.913 U.K. 8.314 Hong Kong 7.916 Israel 7.616 U.S.A. 7.618 Chile 7.520 Germany 7.4 21 Japan 7.1 Rank Country Score23 France 6.726 Botswana 6.027 Taiwan 5.938 South Africa 4.842 South Korea 4.246 Brazil 4.051 Mexico 3.757 Argentina 3.557 China 3.579 Russia 2.388 Indonesia 1.9 C16 - 9 Find out more about Transparency International and the Corruption Perceptions Index by visiting http:/www.transparency.org/documents/cpi/2001/cpi2001.html.Online Application C16 - 10 Financial Risk Factors Current and Potential State of the Countrys Economy A recession can severely reduce demand. Financial distress can also cause the government to restrict MNC operations. Indicators of Economic Growth A countrys economic growth is dependent on several financial factors - interest rates, exchange rates, inflation, etc. C16 - 11 What are the political and financial outlook for various countries? Online Application Consult the Country Commercial Guides prepared by embassy staff at http:/www.usatrade.gov/website/ccg.nsf/ccghomepage?openform. Refer to the CIAs World Factbook at http:/www.odci.gov/. Visit http:/ C16 - 12 Types of Country Risk Assessment A macro-assessment of country risk is an overall risk assessment of a country without consideration of the MNCs business. A micro-assessment of country risk is the risk assessment of a country as related to the MNCs type of business. C16 - 13 Types of Country Risk Assessment The overall assessment of country risk thus consists of :Macro-political riskMacro-financial riskMicro-political riskMicro-financial risk C16 - 14 Note that the opinions of different risk assessors often differ due to subjectivities in: identifying the relevant political and financial factors, determining the relative importance of each factor, and predicting the values of factors that cannot be measured objectively.Types of Country Risk Assessment C16 - 15 Techniques of Assessing Country Risk A checklist approach involves rating and weighting all the identified factors, and then consolidating the rates and weights to produce an overall assessment. The Delphi technique involves collecting various independent opinions and then averaging and measuring the dispersion of those opinions. C16 - 16 Techniques of Assessing Country Risk Quantitative analysis techniques like regression analysis can be applied to historical data to assess the sensitivity of a business to various risk factors. Inspection visits involve traveling to a country and meeting with government officials, firm executives, and/or consumers to clarify uncertainties. C16 - 17 Often, firms use a variety of techniques for making country risk assessments. For example, they may use a checklist approach to develop an overall country risk rating, and some of the other techniques to assign ratings to the factors considered.Techniques of Assessing Country Risk C16 - 18 Developing A Country Risk Rating A checklist approach will require the following steps:Assign values and weights to the political risk factors.Multiply the factor values with their respective weights, and sum up to give the political risk rating.Derive the financial risk rating similarly. C16 - 19 Developing A Country Risk RatingMultiply the ratings with their respective weights, and sum up to give the overall country risk rating.Assign weights to the political and financial ratings according to their perceived importance. A checklist approach will require the following steps: C16 - 20 Developing A Country Risk Rating Different country risk assessors have their own individual procedures for quantifying country risk. Although most procedures involve rating and weighting individual risk factors, the number, type, rating, and weighting of the factors will vary with the country being assessed, as well as the type of corporate operations being planned. C16 - 21 Developing A Country Risk Rating Firms may use country risk ratings when screening potential projects, or when monitoring existing projects. For example, decisions regarding subsidiary expansion, fund transfers to the parent, and sources of financing, can all be affected by changes in the country risk rating. C16 - 22 Comparing Risk RatingsAmong Countries One approach to comparing political and financial ratings among countries is the foreign investment risk matrix (FIRM ). The matrix measures financial (or economic) risk on one axis and political risk on the other axis. Each country can be positioned on the matrix based on its political and financial ratings. C16 - 23UnclearZone AcceptableZoneUnacceptableZoneFinancial Risk RatingPolitical Risk Rating Acceptable UnacceptableStable UnstableThe Foreign Investment Risk Matrix (FIRM) C16 - 24 Actual Country Risk Ratings Across Countries Some countries are rated higher according to some risk factors, but lower according to others. On the whole, industrialized countries tend to be rated highly, while emerging countries tend to have lower risk ratings. Country risk ratings change over time in response to changes in the risk factors. C16 - 25 http:/www.worldbank.org/data/wdi2001/pdfs/tab5_2.pdf http:/ http:/ http:/ http:/ http:/ ApplicationHow risky is your country? Look up: C16 - 26 Incorporating Country Risk in Capital Budgeting If the risk rating of a country is in the acceptable zone, the projects related to that country deserve further consideration. Country risk can be incorporated into the capital budgeting analysis of a project by adjusting the discount rate, orby adjusting the estimated cash flows. C16 - 27 Adjustment of the Discount Rate The higher the perceived risk, the higher the discount rate that should be applied to the projects cash flows. Adjustment of the Estimated Cash Flows By estimating how the cash flows could be affected by each form of risk, the MNC can determine the probability distribution of the net present value of the project.Incorporating Country Risk in Capital Budgeting C16 - 28 Applications ofCountry Risk Analysis Alerted by its risk assessor, Gulf Oil planned to deal with the loss of Iranian oil, and was able to avoid major losses when the Shah of Iran fell four months later. However, while the risk assessment of a country can be useful, it cannot always detect upcoming crises. C16 - 29 Applications ofCountry Risk Analysis Iraqs invasion of Kuwait was difficult to forecast, for example. Nevertheless, many MNCs promptly reassessed their exposure to country risk and revised their operations. The 1997-98 Asian crisis also showed that MNCs had underestimated the potential financial problems that could occur in the high-growth Asian countries. C16 - 30 Online Application For more information on the Asian crisis, check out the following sites: http:/www.stern.nyu.edu/nroubini/asia/AsiaHomepage.html http:/www.asienhaus.org/navigat/english/asienhau.htm C16 - 31 Reducing Exposureto Host Government Takeovers The benefits of DFI can be offset by country risk, the most severe of which is a host government takeover. To reduce the chance of a takeover by the host government, firms often use the following strategies:Use a Short-Term Horizon This technique concentrates on recovering cash flow quickly. C16 - 32 Reducing Exposureto Host Government TakeoversRely on Unique Supplies or Technology In this way, the host government will not be able to take over and operate the subsidiary successfully.Hire Local Labor The local employees can apply pressure on their government. C16 - 33 Borrow Local Funds The local banks can apply pressure on their government.Purchase Insurance Investment guarantee programs offered by the home country, host country, or an international agency insure to some extent various forms of country risk.Reducing Exposureto Host Government Takeovers C16 - 34 The U.S. government provides investment insurance through the Overseas Private Investment Corporation (OPIC). Visit the OPIC at http:/www.opic.gov/. The World Banks Multilateral Investment Guarantee Agency (M IGA) offers political risk insurance to investors in emerging economies. Visit the M IGA at http:/www.miga.org.Online Application C16 - 35 Impact of Country Risk on an MNCs Value nt tmj tjtj k1= 1 , ,1 ER ECF E = ValueE (CFj,t ) = expected cash flows in currency j to be received by the U.S. parent at the end of period tE (ERj,t ) = expected exchange rate at which currency j can be converted to dollars at the end of period tk = weighted average cost of capital of the parentExposure of Foreign Projects to Country Risks C16 - 36 Why Country Risk Analysis Is Important Political Risk Factors Attitude of Consumers in the Host Country Attitude of Host Government Blockage of Fund Transfers Currency Inconvertibility War Bureaucracy CorruptionChapter Review C16 - 37 Chapter Review Financial Risk Factors Current and Potential State of the Countrys Economy Indicators of Economic Growth Types of Country Risk Assessment Macro-Assessment of Country Risk Micro-Assessment of Country Risk C16 - 38 Chapter Review Techniques of Assessing Country Risk Checklist Approach Delphi Technique Quantitative Analysis Inspection Visits Combination of Techniques C16 - 39 Chapter Review Developing a Country Risk Rating Example of Measuring Country Risk Variation in Methods of Measuring Country Risk Using the Country Risk Rating for Decision-Making Comparing Risk Ratings Among Countries Actual Country Risk Ratings Across Countries C16 - 40 Chapter Review Incorporating Country Risk in Capital Budgeting Adjustment of the Discount Rate Adjustment of the Estimated Cash Flows Applications of Country Risk Analysis C16 - 41 Chapter Review Reducing Exposure to Host Government Takeovers Use a Short-Term Horizon Rely on Unique Supplies or Technology Hire Local Labor Borrow Local Funds Purchase Insurance Impact of Country Risk on an MNCs Value