Page 215 - DMGT549_INTERNATIONAL_FINANCIAL_MANAGEMENT

International Financial Management

Notes would be expected to be high. Inflation has a negative effect on credit rating with high inflation
countries being generally ranked lower to countries with low or moderate inflation.
Country credit rating by some institutions such as Euromoney, Institutional Investor, Business
International’s country assessment system, International Country Risk Guide, etc., is an attempt
to assess country risk on an ongoing basis. For example, Euromoney now gives the country risk
rankings after every 6 months. Periodic country visits to countries of special interest and regular
contact with people are essential for improving the quality of country risk analysis.

Task Identify a few economic and political factors that are important in determining
country risk. You could use the world development indicators to calculate the various
economic and political factors. The factors identified could serve as the explanatory
variables. For the dependent variable you could use the country credit worthiness rating
as reported in the Institutional Investor or Euromoney Journal. The multiple regression
analysis technique could be then used to identify the determinants of country risk rating.

Self Assessment

Fill in the blanks:
13. If the balance of payments on the current account is ……………………, the creditworthiness
of the country under analysis would be expected to be high.
14. Inflation has a …………………… effect on credit rating.
15. Country risk analysis requires a comprehensive and coordinated approach and also
demands constant monitoring of key variables and reliable assessment of the policies of
the …………………… .

Case Study Managing Country Risk

F und managers are becoming increasingly aware that they need to take a view on
currency movements as well as on the prospects for bonds and equities.

Since 1991, by liberalizing its economy, India has been struggling to gain a firm position
in the global economy. Though it has attracted many foreign investors, it has not succeeded
in retaining them. Most of the companies have left the country either because of the
infrastructure, which has to go a long way before they meet the international standards or
because of the government policies, which are not favorable for carrying out business in
India. The basic requirements for carrying on any business like power, roads,
telecommunication, etc. are not up to the mark.
Questions
1. Identify the financial and political factors for an MNC to consider while assessing
country risk in India.
2. Describe the various steps taken by the government in the last 2-3 years to attract
more foreign players.
3. How important is political risk for a country like India? Elucidate with examples.

Source: International Financial Management, Madhu Vij, Excel Books.

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