Page 205 - DMGT549_INTERNATIONAL_FINANCIAL_MANAGEMENT

International Financial Management

Notes finance available. The analyst must then assess whether the country’s future borrowing
requirements are consistent with its debt servicing capacity.
3. Resource Base: The resource base of a country consists of its national, human and financial
resources. Other things remaining the same, a nation with substantial natural resources is
a better economic risk than the one without those resources. But other things are not
always equal. Thus, resource rich nations such as Mexico or Argentina are more risky than
South Korea or Taiwan. This is due to the quality of human resource and the degree to
which these resources are allowed to be put to their most efficient use.
4. Adjustment to External Shocks: The ability of the country to withstand unforeseen shocks
is another important factor in economic analysis. History shows that the vulnerability of
external shock varies from nation to nation, with some countries dealing successfully
with these shocks and others succumbing to them. Domestic policies play a crucial role in
determining how effectively a nation copes with external shocks.
Some of the important factors which can be examined here include imports and exports as a
proportion of GDP, vulnerability of the economy to changing prices of main exports and imports,
compressibility of imports, i.e., extent to which imports consist of non-essentials, diversification
of exports by category and by geographical area, etc.

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Caution The assessment of sovereign creditworthiness essentially focuses on the
identification of prospective country specific risks, namely economic and political factors.
This analysis helps the risk specialist in determining which countries represent acceptable
risk. It then advises the amount to be lent to specific countries.

Self Assessment

Fill in the blanks:
8. The …………………… rate is used as a measure of economic instability, disruption and
government mismanagement.
9. The …………………… base of a country consists of its national, human and financial
resources.

10. The ability of the country to withstand unforeseen shocks is another important factor in
…………………… analysis.

12.4 Techniques to Assess Country Risk

The techniques to assess country risk mainly try and identify certain key economic, political and
financial variables including a country’s economic growth rate, its current account balance
relative to gross domestic product and various ratios – debt to GDP, debt- service payments to
GDP, savings to investment, interest payments to GDP, etc. These ratios mainly try and find out
directly or indirectly a country’s ability to repay its external financial obligations on schedule.
Also, the broad parameters identified help to expose the basic strengths and weaknesses of a
country. Listed below are some of the more popular indicators to assess country risk.

Debt Related Factors

The debt related factors are the quickest and commonest variables employed to test the possibility
of a country defaulting due to debt. To predict the risk of default, there are two different theoretical

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