Country Risk Assessment: Romania - Essay Example

Most of the businesses manage their risks through financial techniques such as insurance, hedging and ROI calculations. But to develop an effective contingency plan it is important to undertake the economic, political and social evaluation of the country in which the investment is planned to be undertaken. It is not possible to prescribe a significant formula but a relatively common analytical framework can be established. Although many indicators are available which can eke in the process of country risk assessment but some common but important indicators are useful in undertaking a successful evaluation.

The risk assessment techniques have to put up with several shortcomings, which undermine the application of these techniques. First and foremost problem is the availability of right information. Some researchers state the fact that the data that reported for FDI in some countries are different from the reality and is overstated. About of flight capital later returns ("round-trips") as FDI when opportunities emerge. (Gunter, 2004) The techniques tend to become biased according to the judgements of evaluator since there are not set criteria to determine the dangers with any degree of certainty.

The kind of risk and the degree of risk are completely dependent upon the evaluator's will. The social, political and the cultural beliefs of the evaluator can effect the results.There are some set indicators, which are used as crucial factors in determining the risks attached to a country. An evaluator should undertake the analysis of all the different disciplines and levels. The open theories address all the aspects such as political social and technological extending its scope from other theories, which are confined only at studying the economic consequences.

The government policies of privatization and nationalization of the industries in the host country are also important matter of concern. In Romania the Government is taking steps to privatize energy, steel and metal working companies. The other economic indicators include the GDP, Inflation rate, GDP per capita. The figures for Romania revealing the economic conditions of the country are as follows:Indicators 2005 2006 GDP (USD billion)79.910 89.657 Real GDP growth (constant prices)5.0% 5.0%GDP per capita (USD)3602.677 4053.548 Inflation rate 8.8% 6.9% Source: IMF - 2005 dataIn today's global economic environment the degree of economic freedom is also an indicator of immense importance which comprises seven major areas to be tested for economic freedom.

The seven areas covered by the index are: 1) size of government, 2) economic structure and use of markets, 3) monetary policy and price stability, 4) freedom to use alternative currencies, 5) legal structure and security of private ownership, 6) freedom to trade with foreigners,and 7) freedom of exchange in capital markets. (Conklin, 2002) The most revealing indicator of an economy's performance is the GDP growth rate. In Romania the GDP mitigated in 2005 due to floods and the increase of imported products.

This was a lower growth rate, which was 8.3% in 2004. The scenario explains that the CRA techniques cannot be