Title of paper: The determinants of country risk analysis - An empirical approach
Vij Madhu
Faculty of Management Studies, University of Delhi, Delhi - 110007
Recent years have witnessed an unprecedented interest and research in identifying the determinants of country risk analysis. Institutions engaged in managing global investment strategies are exposed to country risk — the risk that economic, social and political events in a foreign country would adversely affect an institution's financial interest. Managers frequently rely on country risk analysis while formulating their strategies.
The paper examines the effect of various economic and political factors on country risk ratings published by Euromoney and Institutional Investor. As global competition drives corporations, managers frequently rely on country risk analysis as a crucial aspect of strategic decision-making.
The purpose of this paper is to investigate the extent to which country risk measures can help in predicting country ratings. We examine seven widely used measures of country risk across sixty-one countries.
Results from the empirical analysis indicate that country risk ratings can be replicated to a significant degree with a few available political and economic indicators. Political risk was found to exert a significant influence on country ratings. The results also confirmed that both Euromoney and Institutional ratings predicted similar outcomes.
Comparison Across Countries
East Asia and the Pacific
GNP per capita seems to be the most important factor in evaluating country risk.
South Asia
For South Asian countries the two factors, which significantly affect the rating of a country are, political risk and gross capital formation.
Latin America and Caribbean
The political risk factor seems to be the most important variable here and the power of this variable lends support to empirical research (e.g. Ingram, 1974) that countries tend to experience political instability before expropriation measures are imposed.
Europe and Central Asia
The influence of political risk once again seems to be the most important discriminating variable for countries in Europe and Central Asia and is highly significant. However, if the political risk factor was excluded from our analysis, then gross capital formation seems to become more relevant.
Middle East and North Africa
Political risk is the relevant variable in this group and is highly significant.
Sub-Saharan Africa
A stepwise analysis here picks up political risk and GNP per capita as the two most significant variables that improve the predictability of the equation.
