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Multinational Financial
Management
Alan Shapiro
7th Edition
J.Wiley & Sons
Power Points by
Joseph F. Greco, Ph.D.
California State University, Fullerton
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CHAPTER 6
COUNTRY RISK
ANALYSIS
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PART I. THE MEASUREMENT OF
POLITICAL RISK
I. MEASURING POLITICAL RISK
A. Country-specific perspective
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THE MEASUREMENT OF POLITICAL RISK
B. Political Stability
1. Measured by:
a.
Frequency of government
changes
b.
Level of violence
c.
Number of armed
insurrections
d.
Conflict with other states
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THE MEASUREMENT OF POLITICAL RISK
C.
Economic Factors
1. Indicators of political
unrest
a. Rampant inflation
b. Balance of payment
deficits
c. Slowed growth of per
capita GDP
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THE MEASUREMENT OF POLITICAL RISK
D.
Subjective Factors
1. Profit Opportunity
Recommendation
2. Political Risk and Uncertain
Property Rights
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THE MEASUREMENT OF POLITICAL RISK
3. Capital Flight
a. Definition:
the export of savings by a
nation’s citizens because of
safety-of-capital fears.
b. Measurement: use the
balance-of- payment account
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THE MEASUREMENT OF POLITICAL RISK
c.
Causes of capital flight
1.)
2.)
3.)
Inappropriate economic
policies
Expectation of devaluation
High political risk
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PART II. ECONOMIC AND
POLITICAL FACTORS
II.
A.
B.
C.
D.
Economic and Political Factors
Primary focus: How well is the country
doing economically?
Fiscal Irresponsibility
-high government deficits
Monetary Instability
Controlled Exchange Rate System
-currency usually overvalued
Wasteful Government Spending
-inability to service foreign debt
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ECONOMIC AND POLITICAL
FACTORS
D. Resource Base
-lack of strong work ethic
E. Country Risk and Adjustment to
External Shocks
1.
What are the impacts of
external shocks:
-how well a nation responds
varies
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ECONOMIC AND POLITICAL
FACTORS
2.
Key Indicators of Country Risk
a. Relative size of government
debt
b. Money expansion
c. Existence of governmentimposed barriers to market
forces
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ECONOMIC AND POLITICAL
FACTORS
2.
Key Indicators of Country Risk
(con’t)
d. Level of tax rates
e. Amount of government-owned
firms
f.
Political and fiscal responsibility
g. Amount and extent of
corruption
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ECONOMIC AND POLITICAL
FACTORS
Key indicators of economic health
a.
Structural incentives
b.
Legal structure
c.
Clear incentives to save
d.
Open economy
e.
Stable macroeconomic
policies
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PART III. COUNTRY RISK ANALYSIS
IN INTERNATIONAL BANKING
I.
Country Risk and the Terms of Trade
What ultimately determines a
nation’s ability to repay foreign
loans?
- the speed of adjustment
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COUNTRY RISK ANALYSIS IN
INTERNATIONAL BANKING
II. The Government’s Cost/Benefit
Calculus
- debt to wealth ratio
- cost of default
- fluctuations in the terms of
trade
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COUNTRY RISK ANALYSIS IN
INTERNATIONAL BANKING
III. Lessons from the International Debt
Crisis of 1982
Economic reforms that work:
•
•
•
•
•
Strong head of state
Viable economic plan
Competent economic team
Support “at the top”
Sell the program to all levels of society
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