Country risk - What is it? How is it calculated? Examples, and more

Risk country

An indicator that measures the probability of non-compliance with the financial obligations of any nation.

What is the country risk?

Country risk is an indicator that measures the probability of non-compliance with the financial obligations of any nation.

For its study, the analysis of different economic, historical, political, financial, and sociological aspects is required. In short, it is about the probability of financial loss of a particular nation, caused by macroeconomic, social, political, or natural circumstances.

This type of financial risk is important for foreign investors when deciding to place their funds since it is related to the eventuality that a State is unable to fulfill its obligations with a foreign agent.

The higher the country's rating, the greater the risk assumed when making an investment.

How is country risk calculated?

Rating the country risk of a nation involves a multidisciplinary task. To do so, aspects from various areas of knowledge and through different sources of information are analyzed. These can be classified publicly or privately.

The first highlights governments and their statistical agencies, as well as central banks, public ECAs, IFIs, and multilateral organizations. In the second form, rating and qualifying agencies, investment and commercial banks, the media (especially the press) and insurance companies stand out.

In addition, information from research centers and public or private associations is considered, which offer data and statistics that allow the country risk to be studied and analyzed.

Purely qualitative methods

These do not have a specific structure. They consist of reports that explain the different aspects of the nation, which contribute to the study analysis to assess country risk. These data include the political and social situation, the economic situation, the balance sheet, and the outlook for the foreign sector.

Its flexibility is due to not having any fixed structure to write the report, becoming its main advantage. However, one drawback to being taken into account is its difficulty in making comparisons of risk levels between some countries, a great disadvantage if the intention is to obtain an ordered table of scores for them.

Structured qualitative methods, with some statistical data

It is a qualitative report with a specific structure that allows the comparison of the situation for several nations simultaneously, evaluating the data of all. Due to its standardized format, it is possible to make these comparisons more easily and without any type of problem.

Structured qualitative methods with scoring techniques

This method, also called a checklist, is common among banks and rating agencies. In its operation, it is required to define certain indicators (among them of the historical, social, macroeconomic, political, social, and financial type) to assign a score within the minimum and maximum values ​​established for each one.

These scores will be reflected together with a global indicator, so it will be very easy to determine a more precise and timely rating regarding the country risk of the nation in question.

Quantitative methods

Econometric and highly structured. There are different methods of this nature that combine qualitative assessment with a quantitative econometric approach.

Among them, the most notable are those of Jeffrey Sachs and those of Balkan, although there are other outstanding but confidential models, such as the CRAM – Country Risk Assessment Model, used by the OECD.

Examples of country risk

Below we will observe the score of different countries in the year 2019, to analyze with greater precision the object of study:

Country	Date	risk score
Argentina	December 02, 2019	2,262
Brazil	December 02, 2019	239
Chile	December 02, 2019	149
Colombia	December 02, 2019	188
Ecuador	December 02, 2019	1,146
bolivia	December 02, 2019	312
Peru	December 02, 2019	101
Uruguay	December 02, 2019	169
Venezuela	December 02, 2019	13,554

 

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