A variety of factors impact country risk, as well as potential market revenue. And since these factors often increase or decrease without notice, it is essential to study the trends.

Factors To Consider

Before committing resources for the purpose of expanding overseas through trade or investment, a number of factors must be analyzed. They include country GDP growth, demographic shifts, political leadership, level of economic and political stability, currency vulnerability, investment flows, existing and projected trade agreements, competing market strengths, projected trade disputes, rule of law, and much more.

Measuring the change in each factor and identifying its impact may require the insight of a risk consultant. However, in lieu of this, the use of common sense and assistance from your banker is essential.

Variables Beyond Any Control

Country risk is affected by a number of variables, including political, economic and social factors. Generally, political risks are assessed in terms of country stability, and are sometimes measured by the level of confidence in a government. Economic risks are reflected by levels of national growth, inflation, unemployment, balance of trade, and taxes. Social risks usually involve social unrest and violence.

But numerous other factors must be considered as well. These include commercial risk, which is mainly viewed in terms of the credit strength of the buyer and the credibility of his or her bank, operational risks, which involve the documentation and customs process, and a host of other nontraditional risks that don’t neatly fit into simple categories. For example, if your customer is located in a country that becomes a member of a powerful trade bloc, he/she may decide to source your product from member countries that are subject to fewer trade barriers.

“Hot Money” Issues

Developing countries, no doubt, tend to pose higher levels of risk than developed countries. For example, a developing country change in leadership is often a time of instability. And the fear that a new government may impose a different economic policy than the previous administration — as in Brazil today — often puts fear in the minds of investors.

Since portfolio investment is driven by market forces and seeks the greatest returns, its flows often surge, then dip, partly based on perceptions of future growth and stability. As a result, it has created havoc on some developing countries’ economies and political structures.

Also known as “hot money,” portfolio investment tends to be short-term investment and is very sensitive to economic or political volatility. Its flows can add an element of risk where none previously existed. In turn, this can put downward pressure on a nation’s currency, creating political instability and social unrest. The Mexican peso, Asian and Russian crises of the 1990s highlight the volatility of hot money.

Mexico, Brazil and Argentina

On December 20, 1994, an attempted currency adjustment by the Mexican government accelerated out of control. Within two days, pressures mounted and currency reserves used to prop up the peso quickly dwindled. As a result, the peso was allowed to float freely. Shortly thereafter, it nose-dived. Like falling dominoes, what began as a short-term liquidity crisis turned into a full panic. Fallout quickly spread to Brazil and Argentina. Today, Brazil’s and Argentina’s economies are again undergoing a severe challenge.

With these and other events, traders and investors have received what some refer to as a “wake-up call,” reminding them that political and economic instability in developing countries can largely affect your customer’s ability to pay for goods shipped. Consequently, companies need to be aware of economic and political trends in target markets in order to protect themselves. In our fast-changing and increasingly competitive global business environment, it is necessary to outperform the competition. But, you must accurately assess all country risks, and plan accordingly.

This article appeared in July 2002. (CB)
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John Manzella
About The Author John Manzella [Full Bio]
John Manzella, founder of the Manzella Report, is a world-recognized speaker, author of several books, and an international columnist on global business, trade policy, labor, and the latest economic trends. His valuable insight, analysis and strategic direction have been vital to many of the world's largest corporations, associations and universities preparing for the business, economic and political challenges ahead.




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