Page 209 - DMGT549_INTERNATIONAL_FINANCIAL_MANAGEMENT

International Financial Management

Notes 12.5 Raters of Country Risk

Rating of a country’s creditworthiness is mainly compiled by two magazines, Institutional
Investor and Euromoney. Institutional Investor has been publishing the ratings since 1981 while
for Euromoney the ratings are available since 1982. The ratings of both the magazines are based
on an evaluation of a number of macro economic financial and political variables.
Table 12.1 gives the criteria for assessing country risk by the two main rating agencies,
Euromoney and Institutional Investor.

Table 12.1: Criteria for Assessing Country Risk

Rating Agencies Criteria for Assessing Country Risk
Institutional Information provided by 75–100 leading banks that grade each country on a
Investor scale of 0–100, with 100 representing least chance of default.
Individual responses are weighted using a formula that gives more
importance to responses from banks with greater worldwide exposure.
Euromoney Assessment based on the following indicators. (Total score 100)
Political risk (25 per cent)
Economic performance (25 per cent)
Debt Indicators (10 per cent)
Credit Ratings (10 per cent)
Rescheduling (10 per cent)
Access to bank finance (5 per cent)
Access to capital markets (5 per cent)
Access to short-term finance (5 per cent)
Discount available on forfeiting (5 per cent)

The table suggests that there is a definite relationship between a country’s credit rating as given
by the two rating agencies and economic, financial and political variables specific to the country.
In addition, a fair amount of subjectivity is also involved in the analysis. The judgement of the
rating analysts in evaluating the economic variables, determining the degree of political stability
and assigning weight to the different variables within the group introduces the qualitative
dimension in the technique of country risk analysis.

Euro-money Country Risk Rankings

The impact of the credit crunch spread across the world over the past 12 months. Eastern Europe
was badly hit, and the Middle East and Asia could no longer claim to be immune.
Few would think the US has become safer as an investment over this period. But at times of
uncertainty investors go with what they know, and the US rises to sixth place – an Obama
bounce, perhaps?
Singapore continues its inexorable rise, it seems, towards a place in the global top 10 and is
clearly the safe haven within the Asia-Pacific region.

The biggest fallers will come as no surprise: Iceland, with its bankrupt banking system, falls
20 places and will be lucky to stay in the top 50 next time round; India’s fall follows the atrocities
of the Mumbai terror attacks.

Table 12.2 presents the March 2011 Euromoney Country risk Rankings.

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