Country Risk Analysis: Brazil, Germany, and U. A. E - Case Study Example

Country Risk Analysis; Brazil, Germany and U. A. E Executive Summary This report delves into the analysis of Brazil, Germany, and U. A. E assessing the risks within these countries using econometric models. The paper aims at advising the management at Wal-Mart to invest in one of these countries. After assessment of the political, economic, currency risk, sovereign risk, country risk, banking sector and social the author of this discourse recommends the U. A. E as most appropriate country that Wal-Mart should consider expanding into with its international adventure. Company Analysis Other markets spell the American public corporation, Wal-Mart Stores as Walmart. The company operates a chain of big department stores that offer discounts on most of their products. By revenue, the company is the best in the world going by the two thousand and eight Fortune Global 500 report. Walmart is a leader in corporate philanthropy, sustainability, as well as provision of employment opportunities. The success and leadership of Walmart started in nineteen sixty-two when the first proprietor, Sam Walton opened the initial discount shop in Rogers, Arkansas. Five years after establishment, the company forced its way into the industry as a trendsetter. By nineteen sixty-seven the company had twenty-four discount stores in Arkansas generating a revenue of twelve and half million United States dollars. One year later, the company acquired its first full-time aviation pilot. His work included offering help to Sam Walton and Bud Walton. The same year the company opened its first store outside the state of Arkansas. The Fortune magazine ranked Walmart as the first company among retailers in the two thousand and nine reports. This was concerning the most admired retail company in the world. Bentonville, Arkansas in the United States of America harbors the headquarters of Walmart. Today, the company has branches operational in fourteen countries. They include among others The United States, Brazil, Argentina, China, Canada, El Salvador, Costa Rica, Honduras, Guatemala, Mexico, Japan, Puerto Rico, Nicaragua, and the United Kingdom. Walmart failed to enter the Indian market directly in spite of the spirited efforts to form a joint venture with Bharti Express. The management attributed this failure to business rules and regulations guiding foreign direct investment in India. Indian laws only allow a single brand of retailers to own fifty-one percent of their business in India, a position already taken by Nike. The company operates under different brand names in different countries. In the United Kingdom, it operates as Asda, Walmex in Mexico, and Seiyu in Japan. Fully owned operations of Walmart are in Canada, Argentina, Puerto Rico, and Brazil. The performance of Walmart beyond the North American market entails mixed fortunes. The Chinese and South American market are very successful while failures in the Germany and South Korea market forced it to pull out. This explains some the reasons the author this discourse chooses the United Arab Emirates after thorough analysis of the three countries under scrutiny. Expansion and investment opportunities in the United Arab Emirates market stand to benefit Walmart more than expanding its business venture in Brazil, one of the countries this paper puts under consideration. The choice of the three countries for Walmart is central to the company because they both present unique opportunities. Brazil for instance, has business operations owned and fully run by the company while Germany on the other hand, provided difficult conditions in the past for Walmart when it attempted operating within that market. The United Arab Emirates enters the scene as new market venture completely for Walmart. Comparative Analysis of Brazil, Germany, and U. A. E Germany Overall, the business climate in Germany is not favorable especially to international business operating through various entry modes. Activity in the Germany market continues to slow down since the first half of the two thousand and twelve financial periods. Opinion surveys conducted during the autumn of two thousand and eleven indicate that real economy in Germany continues to align itself the increasing drop in confidence levels among members of the household as well as businesses. The damaging effects continue to influence up to fifty percent of the exports that covers the gross domestic product. The debt crisis and restrictions of the budget in the European Economic environment besides the slowdown assessed by scholars of economic matters present in the world economy continue affect the business climate negatively. Major trade partners of Germany have contemporary demands within emerging markets that include Poland, China, and Brazil as well as the United States market that continues to fade and no longer holds the capacity to surface the slump in sales in the Western European economic zones. The influence affects’ fifty-five percent of export sales that also covers thirty-eight percent directed to the euro zone (Clague, & Rausser, 1992, 52). The cause of exports suffering emanates from poor levels of investment in many foreign countries. This relates closely with important evaluation of capital goods involved in sales. On a positive note, contributions from the foreign trade towards growth continue to grow towards the positive path. Imports continue slowly go down because of the slump in purchase of materials and equipment by various business companies. The investors continue to postpone their interests in putting capital in the Germany economy because of uncertainties around the continuing increase of the debt crisis as well as unpredictable European economic policy. Other positives in the economy include the satisfactory capacity of business payment behaviors. This associates with extensive self-financing and good profitability. The country continues to witness defaults over the last three financial years. This regards most companies experiencing difficult economic times for long times. This issue alone should sound an alarm to Walmart to remain wary of the Germany market. Difficulty business environments come from reduced activity and hitherto competition from rivals in most industries. The most affect areas relate to some of the aspects that Walmart would want to apply to penetrate the market. They include the e-commerce that comes with competition from new entrant into the internet market. China offers the greatest challenge because it subsidizes most of its foreign exports making them very cheap in the market. Weaknesses of the Germany market include declines in demographics, lack of engineers, limited number of women in the labor market, a weak banking sector, high dependence on world markets, constant backwardness of the eastern Lander, and dominance of the production as well as export of vehicles among many more. Brazil Brazil with a population of one hundred and ninety-eight million people follows the appropriate expansion fiscal policy. Brazil has Gross domestic Product of one and a half trillion United States dollars. The official currency of trade in Brazil is the Real (Baer, 2001, 19). The country pursues a combination of fiscal and monetary domestic policy entailing an offsetting influence on its domestic interest rates. The expansionary domestic policy for Brazil evaluates the existing relationship between rates of inflation and the actual gross national product. The government of Brazil uses a fifteen-year historical average to set the right target. These facts are necessary for Walmart to understand the risks of the country and comprehend expansion as well as growth probabilities in Brazil. The economic cycle of the country revolves around transitionary, emerging, and developed facts among many more features leading to a conclusion that the range is always around the target. This explains one of the reasons that Walmart found the opportunity to grow and enter full ownership and running of its business operations in Brazil. Clearly, the facts show that the country is a big emerging market and requires an approximate six percent rate of inflation to stabilize the utilization potential of six percent growth rate every year. Since economists categorize the country as a developing one, the growth rates an estimated plus or minus two percent (Richard, Jermyn, & Spilling, 2012, 89). The government has mechanisms that shift the policies when the economy fails to hit the set target. The country’s international policy aims at increasing the interest rates as well as adjusting upwards the value of the Real. The policy covers among other things how currency rates and interest rates relate apart from evaluating the balance of payments with foreign countries. This gives the best room for Walmart to develop. The United Arab Emirates The United Arab Emirates country analysis entails examining the social, political, economic, and business risk within this country. UAE appears on the Southwest of the continent of Asia. It borders both the Persian and Oman Gulfs. Economists project the economy of UAE to grow to almost five hundred billion United States dollars by two thousand and eighteen. The growth estimates for a five-year period starting in two thousands and thirteen remain good with prices high. Statistics from the transparency index rank the United Arab Emirates at position twenty-eight of the one hundred and eighty-seven countries under evaluation. Different credit acting agencies give the country an AAA and this shows a stable fiscal morphology (Low, 2012, 41). However, research by Lucintel indicates the country faces few challenges in its growth path to higher levels of economic growth as well as development. The real estate and oil sectors contributed a lot to the rapid growth of the economy. Problems include income inequality and high unemployment rates. The foreign labor is higher than the local labor, which poses a threat in the labor market. Decline in international oil prices almost affected the economy negatively before the government shifted policies to handle debt repayment capability. Drivers of the economy include the position of the country in terms of per capita income. Here, the country ranks eighth in the world. This position influences the economy of the country positively because the rate at which the middle class is impressive. This is essential because this level of people provide a big source of consumption of materials and goods. Over the last decade GDP consumption of the country stands at an average of seventy percent. Important areas giving the country an edge of the other two are geopolitical location, quarterly trends, economic performance, Foreign Direct Investment in each industry, sectoral contributions, trends in the rates of inflation, per capita income, managed budget deficit, favorable balance of payments, foreign exchange reserve, trade structure, R & D expenditures, and exchange rates among many more features. Favorable Factors in the United Arab Emirates The United Arab Emirates is a member of the Country Risk Tier (CRT-3) other members are Kuwait, Bahrain, Qatar, Oman, and Saudi Arabia also members of the Gulf Cooperation Council. The other economic block parallel to CRT-3 is the CRT-4. Over the last financial years, the economy of UAE continues to grow at an average rate of four to five percent annually. The expected decline in the price of oil in the international market will not affect the growth of the GDP negatively because the curve is expected to remain positive. Political unrest in the Middle East such as the current situation in Syria, Iraq, Iran, and now Ukraine will maintain the oil prices relatively high in the global market. Political instability in the Middle East and North Africa appears to influence the business climate in the United Arab Emirates positively. This started with Arab spring in two thousand and eleven. Effects include reduced investor confidence in the unstable countries and most seem to shift their attention to UAE that continues to remain politically stable. This is besides highlighting many social issues. The instability continues to cause oil and gas prices increase largely. This is as opposed to the international demand (Aidoo, & Allen, 2007, 167). Analysts project that the situation will continue into the unforeseeable future meaning that the same benefits of the war will continue to accrue to UAE. The economic risk continues to remain low. Oil and gas dominate the economy of UAE with ninety percent of oil production taking place in Abu Dhabi. This explains why Abu Dhabi receives a fundamental role in the leadership and political as well as economic decision-making moments. Eighty percent of the government revenue comes from hydrocarbons. Dubai is the centre of commerce, finance, tourism, and transportation. Free trade zones that permit one hundred percent foreign ownership in addition to zero taxation drive the economy of UAE. Walmart needs to take advantage of these economic policies to enter the UAE market. The non-oil sector, where Walmart operates continues to remain the biggest contributor to the economy from two thousand and thirteen. The sector expands at average rate of five percent every year with projection showing that the rate will grow further. The political risk in the United Arab Emirates remains moderate. Truly, the unrest in the region does not affect UAE but it remains a matter of great concern. Political analysts suspect that the unemployment rates would be the source of the unrest in this largely peaceful country. Summary The currency risk in UAE is stable. The government remains committed to maintaining the currency rate stable. The only threat comes from the volatile nature of the United States dollar. It is important to note that actions by UAE to withdraw from the GCC single currency will not affect the stability of its currency. The sovereign risk is stable. Initially the rating was positive before revisions due to the impact of Dubai. However, the UAE market remains in a comfortable to surface debt obligations associated with the depth of oil in Abu Dhabi as well as the large foreign assets. The banking sector continues to remain largely stable. Banks do not commit to booking non-performing loans from the Dubai World. This means that lending by banks remains subdued due to the uncertainties of the Dubai World. Conclusion In view of the analysis of Brazil, Germany, and UAE Walmart should consider investing in the United Arab Emirates. The economic climate is favorable, tax exemptions exist, and regulations for foreign ownership remain unrestricted meaning that Walmart can enter the market through FDI. The other options are Licensing and joint venture because the business environment allows the company all opportunities. The growth rate of the non-energy sector remains promising and stands to influence the growth and expansion of Walmart in the United Arab Emirates. Bibliography Aidoo, K., & Allen, D. (2007). The impact of a value added tax on the private sector competitiveness of the United Arab Emirates. Cambridge, Mass, John F. Kennedy School of Government.  Baer, W. (2001). The Brazilian economy: growth and development. Westport, Conn, Praeger. Clague, C. K., & Rausser, G. C. (1992). The emergence of market economies in Eastern Europe. Cambridge, MA, Blackwell. Clough, S. B., & Cole, C. W. (1952). Economic history of Europe. Boston, Heath. Low, L. (2012). Abu Dhabis Vision 2030 An Ongoing Journey of Economic Development. Singapore, World Scientific. Richard, C., Jermyn, L., & Spilling, M. (2012). Brazil. New York, Marshall Cavendish. Read More