PUNJAB COLLEGE OF COMMERCE

Assignment# 04

Name:
Junaid Subhani

Reg. #
L4F14MCOM0017

Course:
International Financial Management

Topic:
Country Risk

Submitted To:
Prof. Hussain Sajjad

Submission Date:
10/02/2016

Country Risk Analysis

Many investors choose to place a portion of their portfolios in foreign securities. This decision
involves an analysis of various mutual funds, exchange traded funds (ETFs), or stock and bond
offerings. However, investors often neglect an important first step in the process of international
investing. When done properly, the decision to invest overseas begins with determining the
riskiness of the investment climate in the country under consideration.

Country Risk:
Country risk refers to the economic, political and business risks that are unique to a
specific country, and that might result in unexpected investment losses.
Two main risk sources need be considered when investing in a foreign country:
Economic Risk:
This risk refers to a country's ability to pay back its debts. A country with stable finances
and a stronger economy should provide more reliable investments than a country with weaker
finances or an unsound economy.
Political Risk:
This risk refers to the political decisions made within a country that might result in an
unanticipated loss to investors. While economic risk is often referred to as a country's ability to
pay back its debts, political risk is sometimes referred to as the willingness of a country to pay
debts or maintain a hospitable climate for outside investment. Even if a country's economy is
strong, if the political climate is unfriendly (or becomes unfriendly) to outside investors, the
country may not be a good candidate for investment.

Sources of Information on Country Risk:

There are many excellent sources of information on the economic and political climate of foreign
countries. Newspapers dedicate significant coverage to overseas events. Many excellent weekly
magazines also cover international economics and politics.
For those seeking more in-depth coverage of a particular country or region, two excellent sources
of objective, comprehensive country information are the Economist Intelligence Unit (EIU) and
the Central Intelligence Agency (CIA) "World Factbook."
Finally, the internet provides access to a host of information, including international editions of
many foreign newspapers and magazines. Reviewing locally produced news sources can
sometimes provide a different perspective on the attractiveness of a country under consideration
for investment.

Common Political Factors:

Let's look at some common political factors that influence the international business landscape.
Economic System:
The type of economic system a country builds is a political choice. Foreign countries often will
have different economic systems from your domestic market and adjustments often need to be
made to take these differences into account.
Blockage of Funds Transfer:
It may be the situation that the host country has a strict policy regarding foreign remittance so, in
a country where you are not able to send your earned money back to your country no need to do
business.
War:
Political conditions are uncertain they can change anytime if in a country where is a war like
situation than there is no need to do business.
Consumers Attitude:
The business which you are going to start or the product you are going to launch is until or
unless is not successful if consumer do not wants it. All you need to do is a proper homework.
Corruption:
It is like a killing insect in the country if it exists in a country so much than to do international is
not feasible. Your cash flows may be the victim of corruption.
Currency Inconvertibility:
A country whose currency is not even known in your home country and to convert that currency
is too much difficult than there is no need to do international business because of currency
inconvertibility issue.
Trade Agreements:
Countries often enter into trade agreements to help facilitate trade between them. If your country
has entered into a trade agreement with another country, conducting business in that country will
usually be easier and less risky because the trade agreement will provide some predictability and
protection.

Economic Risks:
Economic risks may be particularly important in regard to exchange rates, economic volatility,
industry structure and international competitiveness.
Exchange rate risks:
In recent years, the risk of foreign exchange rate movements has become a paramount
consideration, as has the risk that a government may simply lack the economic capacity to repay
its loans. Many countries have been experiencing ongoing fiscal deficits and rapid money-supply
growth. A devaluation of one countrys exchange rate automatically creates pressure for
devaluation in other countries exchange rates. Competitive evaluation pressures are intensified
because of the reliance of many countries on primary product exports and their price volatility.
Risks of Economic Volatility:
Economic stability depends upon a strong banking sector; without it, a foreign exchange crisis
may have a particularly severe impact. An ongoing challenge for financial institutions
everywhere is that the time profile for liabilities is not the same as the one for assets. Banks
borrow short-term from depositors and lend long-term. This exposes the banks to the risks that
fixed assets may fall quickly in price and that depositors may make sudden withdrawals.
Industry risks:
Managers must analyze the domestic situation for industry risks such as the strength of
competitors, the potential for substitutes, the capabilities of suppliers and customers, and the risk
of new entrants. It may be helpful to determine the risk level by developing a matrix in which
each industry risk is evaluated as minor, serious or show-stopping, and in which the various
ways of mitigating each risk are analyzed.
Competitiveness risks:
It will always be necessary for managers to consider a countrys competitiveness factors when
making investment decisions. For example, Latin American countries continue to rank poorly in
international surveys of such factors; labour-intensive export facilities should likely be located in
other regions of the world, despite Latin Americas lower wage levels.

Conclusion:
Overseas investing involves a careful analysis of the economic, political and business risks that
might result in unexpected investment losses. This country risk analysis is a fundamental step in
building and monitoring an international portfolio. Investors that use the many excellent
information sources available to evaluate country risk will be better prepared when constructing
their international portfolios.

References:

https://www.google.com.pk/search?
q=country+risk+in+international+financial+management&biw=1366&bih=667&start=10
&sa=N&dpr=1&bav=on.2,or.&ech=1&psi=RXa7VubRLJCOuAShx6oCQ.1455126896668.3&ei=Enm7VpfdAoS-uAT4tbGwBA&emsg=NCSR&noj=1
http://iveybusinessjournal.com/publication/analyzing-and-managing-country-risks/
http://www.ehow.com/about_6363401_political-risk-affect-international-business_.html
https://www.scribd.com/doc/60989880/Political-Risk-of-Global-Business
http://www.cengage.com/search/productOverview.do?
Ntt=287383784139518751820925278281857137&N=14+4294922239&Ntk=P_EPI
http://www.investopedia.com/articles/stocks/08/country-risk-for-internationalinvesting.asp