Evaluating Country Risk Essay

CRA

Country Risk Evaluation

Country Risk Assessment: Iran

The process of Country Risk Assessment demands a full analysis of a nation's political, economic, and cultural outlook. "Country risk analysis rests on the fundamental premise that growing imbalances in economic, social, or political factors increase the risk of a shortfall in the expected return on an investment" (Meldrum 2000:1). Country Risk Assessment is a holistic process and while there is no scientific formula for assessing risk in all instances, most rating agencies consider the following six factors: economic risk, transfer risk, exchange rate risk, location or neighborhood risk, sovereign risk, and political risk (Meldrum 2000:1)

Economic risk assesses the prudency of the government's fiscal and monetary policy, taxes, and debt. Another concern is transfer risk, "the risk arising from a decision by a foreign government to restrict capital movements. Restrictions could make it difficult to repatriate profits, dividends, or capital" (Meldrum 2000:1). The transfer risk is assessed according to the nation's "ratio of debt service payments to exports or to exports plus net foreign direct investment, the amount and structure of foreign debt relative to income, foreign currency reserves divided by various import categories, and measures related to the current account status" (Meldrum 2000:1).Risk is often defined as the unexpected -- for example, a sudden shift in the nation's currency value should make a company leery. The value of the nation's currency can clearly impact a foreign enterprise's ability to make a profit. "Floating exchange rate systems generally sustain the lowest risk of producing an unexpected adverse exchange movement. The degree of over- or under-valuation of a currency also can help isolate exchange rate risk" (Meldrum 2000:1). Evaluating the nation's currency value involve considering its "real appreciation, real appreciation -- evaluation, exchange-rate regime, change in prospects, expectations of a regime change, interest differentials," and also its black-market and dual exchange rates, if possible (Country risk model, 2011, The Economist).

Neighborhood risk refers to the degree to which regional economic problems can 'spill over' into the nation's borders. (The Middle East is a highly unstable region, which can also affect its economy). Neighborhood risk also involves an assessment of the nation's primary economic….....