Question

8.How do companies assess the riskiness of countries when considering investing in these countries?

Answer 1

Foreign investment is a perfect way to diversify your portfolio of stocks, but investing in Italy or Nigeria isn't the same as investing in the US. Country risk refers to the economic and political risks of a country which can affect its businesses and result in loss of investment. Those changing risk factors are crucial to tracking over time by foreign investors. Measuring the danger of a nation can be a challenging undertaking. From tax laws to political upheaval, investors must take into consideration hundreds, if not thousands, of various factors.

In general, risk for a country can be divided into two groups: economic risks and political risks. The economic risks are linked to the financial condition and ability of a country to repay its debts. A country with a high debt-to - GDP ratio, for example, may not be able to raise money as easily as it can support itself which puts its domestic economy at risk. Political risks are related to the leaders of a nation and the effect of their investment decisions. Desperate politicians supporting nationalizations, for example, could pose a threat to investors in some strategic industries.

There are many different ways of analyzing the risk to a country. Investors have several different tools at their disposal from beta-coefficients to sovereign ratings. A combination of these approaches should be used by foreign investors to assess the risk of a country and the risk associated with any particular international investment or security. Methods used are either quantitative or qualitative for evaluating country risk. For a given country, quantitative analysis uses ratios and statistics to determine risks, such as the debt-to - GDP ratio or the MSCI index beta coefficient. This information can be found by international investors in credit rating agency reports etc.

Qualitative analysis uses subjective analysis to identify risks, such as breaking political news / opinion or realistic rumors about the market. In financial publications such as the Economist and the Wall Street Journal, as well as searching for international news aggregators such as Google News, foreign investors can find this information. The most common way investors evaluate country risk is by sovereign ratings. These agencies issue credit ratings for each country by taking these quantitative and qualitative factors into account, and giving investors an simple way to assess country risk. The three rating agencies most monitored are Standard & Poor's, Moody's Investor Services and Fitch Ratings