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Multinational financial management 7th CH06

Multinational Financial
Management
Alan Shapiro
7th Edition
Power Points by
J.Wiley
& Sons

Joseph F. Greco, Ph.D.
California State University, Fullerton
1


CHAPTER 6
COUNTRY RISK
ANALYSIS
2


PART I. THE MEASUREMENT OF
POLITICAL RISK

I. MEASURING POLITICAL RISK
A. Country-specific perspective

3


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
4


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
5


THE MEASUREMENT OF POLITICAL RISK
D.

Subjective Factors
1. Profit Opportunity
Recommendation
2. Political Risk and Uncertain
Property Rights

6


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
7


THE MEASUREMENT OF POLITICAL RISK
c.

Causes of capital flight
1.)
2.)
3.)

Inappropriate economic
policies
Expectation of devaluation
High political risk

8


PART II. ECONOMIC AND
POLITICAL FACTORS

II.Economic and Political Factors
Primary
focus: How well is the country
doing
economically?
A. Fiscal Irresponsibility
-high government deficits
B. Monetary Instability
C. Controlled Exchange Rate System
-currency usually overvalued
D. Wasteful Government Spending
-inability to service foreign debt
9


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
10


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
11


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
12


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
13


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
14


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
15


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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