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Country Risk AnalysisCountry Risk AnalysisChapter 11Chapter 11

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In this ChapterIn this Chapter

I.I. MEASURING POLITICAL RISKMEASURING POLITICAL RISK

II.II. ECONOMIC AND POLITICAL ECONOMIC AND POLITICAL FACTORSFACTORS

III.III. KEY INDICATORS OF ECONOMIC KEY INDICATORS OF ECONOMIC HEALTHHEALTH

IV.IV. MANAGING POLITICAL RISKMANAGING POLITICAL RISK

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Government Actions Government Actions Causing Political RiskCausing Political Risk1.1. ConfiscationConfiscation2.2. ExpropriationExpropriation3.3. EmbargoEmbargo4.4. Protective tariffsProtective tariffs5.5. Currency controlsCurrency controls

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THE MEASUREMENT OF THE MEASUREMENT OF POLITICAL RISKPOLITICAL RISK

I.I. MEASURING POLITICAL RISKMEASURING POLITICAL RISK

Two Perspectives:Two Perspectives:

A.A. Country-specificCountry-specific

B. Industry-specificB. Industry-specific

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THE MEASUREMENT OF THE MEASUREMENT OF POLITICAL RISKPOLITICAL RISK

C.C. Political Stability Political Stability 1. Measured by:1. Measured by: a.a. Frequency of Frequency of

government government changeschanges b.b. Level of violenceLevel of violence c.c. Number of armed Number of armed

insurrectionsinsurrections d.d. Conflict with other Conflict with other

statesstates

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THE MEASUREMENT OF THE MEASUREMENT OF POLITICAL RISKPOLITICAL RISK

D.D. Economic FactorsEconomic Factors 1.1. Indicators of political Indicators of political

unrestunrest a.a. Rampant inflationRampant inflation b.b. Extreme balance of Extreme balance of payment payment

deficitsdeficits c.c. Slowed growth of per Slowed growth of per

capita GDPcapita GDP

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THE MEASUREMENT OF THE MEASUREMENT OF POLITICAL RISKPOLITICAL RISK

E.E. Subjective FactorsSubjective Factors 1.1. Profit Opportunity Profit Opportunity

Recommendation Recommendation 2.2. Political Risk and Political Risk and

Uncertain Uncertain Property RightsProperty Rights

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THE MEASUREMENT OF THE MEASUREMENT OF POLITICAL RISKPOLITICAL RISK

3.3. CAPITAL FLIGHTCAPITAL FLIGHTa.a. DefinitionDefinitionb.b. MeasurementMeasurementc.c. CausesCauses

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THE MEASUREMENT OF THE MEASUREMENT OF POLITICAL RISKPOLITICAL RISK

Capital FlightCapital Flight a.a. Definition:Definition: the export of savings by a the export of savings by a nation’s citizens because of nation’s citizens because of safety-of-capital fears.safety-of-capital fears. b.b. Measurement: use the Measurement: use the balance-of- payment accountbalance-of- payment account

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b.b. Measurement: use the Measurement: use the balance-of- payment balance-of- payment

accountaccount

Current Account

Capital Account

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THE MEASUREMENT OF THE MEASUREMENT OF POLITICAL RISKPOLITICAL RISK

c.c. Causes of capital flightCauses of capital flight 1.) Expectation of 1.) Expectation of currencycurrency

depreciation depreciation 2.) Inappropriate economic 2.) Inappropriate economic policiespolicies

3.)3.) High political riskHigh political risk Example: Latin America in the 1980’sExample: Latin America in the 1980’s

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THE MEASUREMENT OF THE MEASUREMENT OF POLITICAL RISKPOLITICAL RISK D. Other FactorsD. Other Factors 1.1. Relative size of Relative size of

government government debtdebt 2.2. Rate of money supply Rate of money supply

expansionexpansion 3.3. Existence of Existence of

government-government- imposed imposed barriers to market barriers to market forcesforces

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COUNTRY RISK ANALYSISCOUNTRY RISK ANALYSISPrimary focus: How Primary focus: How

well is the country well is the country doing economically?doing economically?

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II. ECONOMIC AND II. ECONOMIC AND POLITICAL FACTORSPOLITICAL FACTORS

A.A. Fiscal ResponsibilityFiscal Responsibility -high government -high government

deficitsdeficits

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Economic and Political Economic and Political FactorsFactors

B. B. Monetary StabilityMonetary Stability ΔΔMS > MS > ΔΔMDMD

C.C. Freely-floating versusFreely-floating versus Controlled Exchange Rate Controlled Exchange Rate

SystemSystem -currency usually overvalued-currency usually overvalued when currency is pegged.when currency is pegged.

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Economic and Political Economic and Political FactorsFactors D.D. Government SpendingGovernment Spending - Wasteful = inability to - Wasteful = inability to

service service foreign debtforeign debt

E.E. Resource BaseResource Base -lack of strong work -lack of strong work

ethicethic

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III. Key indicators of III. Key indicators of economic healtheconomic health

3.3. 1. 1. Structural incentivesStructural incentives4.4. 2.2. Legal structureLegal structure5.5. 3.3. Clear incentives to saveClear incentives to save6.6. 4.4. Open economy (globally)Open economy (globally)7.7. 5.5. Stable macroeconomic Stable macroeconomic

policiespolicies

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Key Indicators of Key Indicators of Economic HealthEconomic Health

6.6. Level of tax ratesLevel of tax rates 7.7. amount of government-amount of government-

owned owned firmsfirms 8.8. Political and fiscal Political and fiscal

responsibilityresponsibility 9.9. Amount and extent of Amount and extent of

corruptioncorruption

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IV. Managing Political IV. Managing Political RiskRisk How to Avoid Confiscation?How to Avoid Confiscation?

A.A. Pre-investment PlanningPre-investment Planning– 1.1. AvoidanceAvoidance– 2.2. Insurance Insurance – 3. 3. Structuring the Structuring the

investmentinvestment

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Managing Political RiskManaging Political Risk

B.B. Operating Policies:Operating Policies:

Develop local Develop local stakeholdersstakeholders