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Evalutating country risk analysis - Essay Example

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Globalisation has led to investment in new and emerging markets. Developing countries as China and India are also increasingly investing in the field of energy and manufacturing across the globe. International financial institutions and investors need to assess the risk of investing in greenfield areas…
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Download file "Evalutating country risk analysis" to see previous pages... This inter mix of factors creates a complexity in understanding and application of CRA. (Meldrum: 2000).
The measures used for risk evaluation may differ based on the experience and judgement of analysts. These may employ a number of common points initially and then lead to detailed discussion of specific issues affecting a specific sphere of interest.
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Thus a combination of actual and potential imbalances are calculated to apply to a broad investment category.These decisions are judgemental and hence may have limited universal application across the board. (Meldrum: 2000).
Broadly the measures applied by the Political Risk Services' International Country Risk Guide (ICRG) for CRA include political, economic and financial risk. The ICRG also calculates a composite risk which is generally evolved from these base indices. A final measure which some analysts examine with reference to CRA is Institutional Investor's country credit ratings. Thus it would be seen that information is defined in a number of ways. (Erb.Harvey.Tadas:1996). Another problem in CRA is limited availability of historical data in emerging economies. This increases the uncertainty of future prediction. (Damodaran: 2004). Since risk implies identification of a well defined event from a large number of observations which is amenable to probability analysis, lack of the same results in basing CRA on uncertainy. (Meldrum: 2000). Thus analysts tend to construct the risk based on judgmental factors rather than probabilistic criteria. CRA ratings which are easily accessible are by ratings agencies which measure default risk and equity risk which is generally derived. (Damodaran: 2003). These differing perspectives necessitate the need to evolve systematic methodologies for CRA.
Impact of Differing Geographical and Time Perspectives
Risks between countries can vary due to national differences in economy, policy, geography, currency and a host of socio-political factors. For example comparing the period in Romania in the pre and post Cold War era uniformly is likely to result in totally varied results. However many times risk analysts tend to use uniform criteria to assess country risks beyond time as well as situations differential faced in making such an assessment. While inclusive country risk measures are correlated with each other, for higher returns risk analysts recommend value-oriented strategies across the board which may create anomalies. (Erb.Harvey.Tadas:1996). Thus factors which are common for all countries need to be identified.
Application of financial risk measures is likely to be done uniformly evolving information of future expected returns and political risk criteria are likely to be ignored. (Erb.Harvey.Tadas:1996). This is supported by evidence from ICRG composite, financial and economic ratings, which appear standardised. (Erb.Harvey.Tadas:1996). While economic factors are also evolving the real challenge is to assess the political risk particularly in emerging economies as Romania.
Problems of Quantitative and Qualitative Methods
CRA include a mix of qualitative and quantitative analysis. Some as the Bank of America World Information Services is based exclusively on quantitative information while the Institutional Investor is a qualitative survey based on opinions of banking professionals taking a number of non quantitative factors ...Download file "Evalutating country risk analysis" to see next pagesRead More
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