Presentation on theme: "COUNTRY RISKS. Most OECD & many non-OECD countries have GSE’s insuring FDI against political risk. Political Risk – World Bank definition: Political risks."— Presentation transcript:
1 COUNTRY RISKS
2 Most OECD & many non-OECD countries have GSE’s insuring FDI against political risk. Political Risk – World Bank definition: Political risks are associated with government actions which deny or restrict the right of an investor/owner i) to use or benefit from his/her assets; or ii) which reduce the value of the firm. Political risks include war, revolutions, government seizure of property and actions to restrict the movement of profits or other revenues from within a country
3 OECD uses a variety of macro measurements to construct country risk classification for trade credit insurance. LinkLink
4 Currency Controls: Malaysia In current financial markets, many emerging markets will impose currency controls to keep hot money from entering the market. In 1998, Malaysia implemented controls to keep foreign investors from exiting the market forcing them to wait 1 year to repatriate financial income. Link
5 Nationalization: Venezuela Chavez: Venezuela will nationalize gold mines Chavez orders nationalization of Cargill Venezuelan President Hugo Chavez said Wednesday he had ordered the nationalization of at least some of the operations of the U.S.-based food giant Cargill and threatened to do the same with the Caracas-based food maker Polar Link
6 Polity IV
7 Theories of Conflict World Development Report 2011 Chapter 2World Development Report 2011 Chapter 2 Rapid Change and Rising Expectations Voracity and Resource Curse Horizontal Inequality Lack of State Capacity Poor Institutions. Political violence associated with: Rapid Urbanization Youth Unemployment Income Inequality Weak Governance Low growth, low income countries with high natural resource share more than 10 times as likely to experience political violence.
9 Regimes Autocracy: Self-perpetuating regime with ability to strictly limit activities of political opposition. Anocracy: Regime w/o electoral democracy but lacking means to completely eliminate opposition or lacks direct instruments of self- perpetuation. implementing a staged transition from autocracy to greater democracy. institute piecemeal reforms due to increasing demands from emerging political groups. weakened by corruption or dissension and losing their capacity to maintain strict political controls and suppress dissent.
10 Anocracies are by far most likely to see government threatening instability.
11 Global Report 2014 Conflict, Governance, and State Fragility
12 Link Polity IV data set
14 Fiscal RISKS
15 Debt IMF Fiscal Monitor
16 Crisis spreads to other countries Background Reading
18 Primary Deficit Simplified Government Budget Primary Revenue (less Interest Income) - Primary Expenditure (less Interest Paid) Primary Budget Deficit + Net Interest Payments on Existing Debt Overall Budget Deficit
19 If then Debt-to-GDP ratio stays stable. If > then deficit is “unsustainable” Sustainable Deficit A growing economy allows the government to borrow some money every year and still keep debt in line with overall GDP
20 Sustainable Primary Deficit If then stays stable.
21 Primary Balance % of GDP
23 http://www.imf.org/external/pubs/ft/fm/2011/02/fmindex.htm 32.9062534.5 34.5
25 Consequences of Deficits Austerity Financial Repression Seignorage Default
28 Financial Repression Indebted governments often draw financing from captive financial institutions to keep interest rates low. Domestic banks, public pension funds Increased reserve requirements International capital controls. Link
29 Seignorage - Central Bank prints money to buy government debt. Link
30 Default Link
31 Final Exam Saturday, December 13 th, LG5201 12:30-3:30. Cumulative. Similar to mid-term and practice exams. Bring writing instruments and a calculator. Semi-open book – Bring 1 A4 size paper with handwritten notes on both sides. Office Hours: Standard TR 4:30-5:30 and MW 2-3:30.
32 Can you run a deficit every year?
In 1997, The Participants to the Arrangement on Officially Supported Export Credits (The Participants to the Arrangement), established a methodology for assessing country credit risk and classifying countries in connection with their agreement on minimum premium fees for official export credits(1)
The Participants’ country risk classifications are one of the most fundamental building blocks of the Arrangement rules on minimum premium rates for credit risk. They are produced solely for the purpose of setting minimum premium rates for transactions supported according to the Arrangement and they are made public so that any country that is not an OECD Member or a Participant to the Arrangement may observe the rules of the Arrangement if they so choose. Neither the Participants to the Arrangement nor the OECD Secretariat endorse nor encourage their use for any other purpose.
The country risk classifications are meant to reflect country risk. Under the Participants’ system, country risk encompasses transfer and convertibility risk (i.e. the risk a government imposes capital or exchange controls that prevent an entity from converting local currency into foreign currency and/or transferring funds to creditors located outside the country) and cases of force majeure (e.g. war, expropriation, revolution, civil disturbance, floods, earthquakes).
The country risk classifications are not sovereign risk classifications and should not, therefore, be compared with the sovereign risk classifications of private credit rating agencies (CRAs). Conceptually, they are more similar to the "country ceilings" that are produced by some of the major CRAs.
According to the rules of the Arrangement, two groups of countries are not classified. The first group is not classified for administrative purposes and is comprised of very small countries that do not generally receive official export credit support. For such countries, Participants are free to apply the country risk classification which they deem appropriate.
The second group of countries is comprised of High Income OECD countries and other High Income Euro-zone countries. Transactions involving obligors in these countries (and any countries classified in Category 0) are subject to the market pricing disciplines set out in Article 24c) and Annex X of the Arrangement.
All other countries (and a limited number of supranational multilateral/regional financial institutions) are classified into one of eight categories (0-7) through the application of a two-step methodology:
A quantitative model constructed specifically for this purpose: The Country Risk Assessment Model (CRAM) produces a quantitative assessment of country credit risk based on three groups of risk indicators (the payment experience reported by the Participants, the financial situation and the economic situation based primarily on IMF indicators).
A qualitative assessment of the CRAM results by country risk experts from OECD Members in order to integrate factors not fully taken into account by the model. This could lead to an adjustment (upwards or downwards) of a country compared to the CRAM results. Any adjustment has to attract a consensus among Experts.
The group of country risk experts meet several times a year. These meetings are organised so as to guarantee that every country is reviewed whenever a fundamental change is observed and at least once a year. The list of country risk classifications is publically available and published on the OECD website after each meeting; however the meetings themselves and the exchanges and deliberations that take place are strictly confidential.
(1)Accordingly, no historical classifications are available for prior years.
Current Country Risk Classifications
Historical Country Risk Classifications
Additional Information on the Country Risk Classification Process
- Operational procedures for the Country Risk Experts Group: TAD/PG(2017)11/FINAL (December 2017 revision).
Last updated on 21 December 2017