Multinational Financial Management Alan Shapiro 7th Edition Power Points by J.Wiley & Sons Joseph F Greco, Ph.D California State University, Fullerton CHAPTER COUNTRY RISK ANALYSIS PART I THE MEASUREMENT OF POLITICAL RISK I MEASURING POLITICAL RISK A Country-specific perspective THE MEASUREMENT OF POLITICAL RISK B Political Stability 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 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 Profit Opportunity Recommendation Political Risk and Uncertain Property Rights THE MEASUREMENT OF POLITICAL RISK Capital Flight a Definition: the export of savings by a nation’s citizens because of safety-of-capital fears b Measurement: use the balance-of- payment account THE MEASUREMENT OF POLITICAL RISK c Causes of capital flight 1.) 2.) 3.) Inappropriate economic policies Expectation of devaluation High political risk PART II ECONOMIC AND POLITICAL FACTORS II.Economic and Political Factors Primary focus: How well is the country doing economically? 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 D Resource Base -lack of strong work ethic E Country Risk and Adjustment to External Shocks What are the impacts of external shocks: -how well a nation responds varies 10 ECONOMIC AND POLITICAL FACTORS Key Indicators of Country Risk a Relative size of government debt b Money expansion c Existence of governmentimposed barriers to market forces 11 ECONOMIC AND POLITICAL FACTORS Key Indicators of Country Risk (con’t) d Level of tax rates e Amount of government-owned firms f Political and fiscal responsibility g Amount and extent of corruption 12 ECONOMIC AND POLITICAL FACTORS Key indicators of economic health a Structural incentives b Legal structure c Clear incentives to save d Open economy e Stable macroeconomic policies 13 PART III COUNTRY RISK ANALYSIS IN INTERNATIONAL BANKING I Country Risk and the Terms of Trade What ultimately determines a nation’s ability to repay foreign loans? - the speed of adjustment 14 COUNTRY RISK ANALYSIS IN INTERNATIONAL BANKING II The Government’s Cost/Benefit Calculus - debt to wealth ratio - cost of default - fluctuations in the terms of trade 15 COUNTRY RISK ANALYSIS IN INTERNATIONAL BANKING III Lessons from the International Debt Crisis of 1982 Economic reforms that work: • • • • • Strong head of state Viable economic plan Competent economic team Support “at the top” Sell the program to all levels of society 16