Current Approaches to Country Risk Analysis
This article deals with the topic of country risk analysis. Different approaches to this problem, ratings developed by international rating agencies and their grades were examined. Ukrainian performance in these ratings was examined, as well as reasons of such performance. В статті розглянуто різні...
Saved in:
| Published in: | Економічний вісник Донбасу |
|---|---|
| Date: | 2013 |
| Main Authors: | , , |
| Format: | Article |
| Language: | English |
| Published: |
Інститут економіки промисловості НАН України
2013
|
| Subjects: | |
| Online Access: | https://nasplib.isofts.kiev.ua/handle/123456789/123373 |
| Tags: |
Add Tag
No Tags, Be the first to tag this record!
|
| Journal Title: | Digital Library of Periodicals of National Academy of Sciences of Ukraine |
| Cite this: | Current Approaches to Country Risk Analysis / N.O. Potyomkina, E.S. Voshchyna, M.M. Breiman // Економічний вісник Донбасу. — 2013. — № 4 (34). — С. 18–22. — Бібліогр.: 11 назв. — англ. |
Institution
Digital Library of Periodicals of National Academy of Sciences of Ukraine| _version_ | 1859591723198447616 |
|---|---|
| author | Potyomkina, N.O. Voshchyna, E.S. Breiman, M.M. |
| author_facet | Potyomkina, N.O. Voshchyna, E.S. Breiman, M.M. |
| citation_txt | Current Approaches to Country Risk Analysis / N.O. Potyomkina, E.S. Voshchyna, M.M. Breiman // Економічний вісник Донбасу. — 2013. — № 4 (34). — С. 18–22. — Бібліогр.: 11 назв. — англ. |
| collection | DSpace DC |
| container_title | Економічний вісник Донбасу |
| description | This article deals with the topic of country risk analysis. Different approaches to this problem, ratings developed by international rating agencies and their grades were examined. Ukrainian performance in these ratings was examined, as well as reasons of such performance.
В статті розглянуто різні підходи щодо оцінювання ризику країни, рейтинги, що складаються професійними рейтинговими агентствами, шкали, що ними використовуються. Проаналізовано методи, що використовуються для створення рейтингів ризику країни. Розглянуто питання щодо позиції, що займає Україна у світових рейтингах, причинах знаходження на цій позиції.
В статье были рассмотрены различные подходы к оценке странового риска, рейтинги, составляемые профессиональными мировыми рейтинговыми агентствами, шкалы, используемые ими. Проанализированы методы, применяемые для составления рейтингов странового риска. Рассмотрен вопрос о позиции, занимаемой Украиной в мировых рейтингах, причинах нахождения на этой позиции.
|
| first_indexed | 2025-11-27T15:39:14Z |
| format | Article |
| fulltext |
18
Економічний вісник Донбасу № 4 (34), 2013
Introduction
Analyzing risks is a natural part of investment
decision-making process. Every investor considers
different types of risk, but majority of professional
investors agree that this process must begin with a country
risk analysis. To check, if this approach is correct or
not, one can simply look through the current news. This
article is written in 2013, and just the year before, in
2012, investors, governments, and citizens of the
Eurozone suffered a huge loss resulting from a sovereign
default of Greece [1]. The other European country –
Cyprus, was one of the Greece creditors. But in the
March of 2013 Cyprus itself went into a debt crisis [2].
Cyprus is a relatively small European country, but
outcomes of its possible default are significant. This
country was known as a tax haven, or an offshore-zone,
mostly used by the countries of Eastern Europe –
especially by Russia and Ukraine. It is enough to say,
that Cyprus is the biggest source of investment flows
into Ukraine, which is in fact mostly Ukrainian money,
coming back from Cyprus banks performing role of a
financial laundry. Cyprus served as a base (officially) for
many financial institutions, funds, banks, etc. The latest
news is such that Cyprus financial system will receive a
bail-out from EU [3]. However, foreign deposits in Cyprus
banks are most likely to be taxed. It all results in a huge
loss for those, who invested (or stored) their money in
Cyprus financial sector.
Current approaches to assessment of country risk
In a modern economy it is a role of global institutions
(usually rating agencies) to analyze the country risk. Of
course, comprehensive investment analysis usually
includes a country risk assessment made “in-house”,
however:
a. Even if analysis is made in-house, it usually relies
on the competent data and opinion of rating agencies
b. Country risk is considered an important question
on the early stages of the investment decisions, when
full analysis isn't done yet. In this case, ratings of the
country risk are the only source of information.
There are several agencies that could be seen as
reliable sources, like Standard & Poor’s, Moody’s, Fitch,
Economist Intelligence Unit, Euromoney, Institutional
Investor, Political Risk Services, Business Environmental
Risk Intelligence, Control Risks Information Services,
international banks in general and others institutions. Some
of them also provide information and analysis of
economic sectors, companies and operations, assigning
related ratings.
Nowadays, the rating system is wide known and
used all over the world. Moody’s and Standard & Poor’s
rating systems use to divide countries in categories as
below and the four first levels of each one are considered
“investment grades” (better quality of the asset in risk
terms). Based on their evaluations, the agencies give their
opinion in the form of letter grades, which are published
for use by investors (see table 1 below). For the typical
investor, risk is judged not by a subjectively formulated
probability distribution of possible returns but by the credit
rating assigned to the asset by investment agencies. In
their ratings, the agencies attempt to rank issues according
to the probability of default. Both agencies also have a
Credit Watch list that alerts investors when the agency is
considering a change in rating for a particular borrower.
Moody’s and Standard & Poor’s do not have an
econometric model for country risk analysis. Standard
& Poor’s follows the behavior of many macroeconomic
variables and other relevant information, and compares
the outcomes with the peer group of countries.
Moody’s believes that credit rating is by nature
subjective. Moreover, because long-term credit judgments
involve so many factors unique to particular industries,
issuers and countries that any attempt to reduce credit
rating to a formulaic methodology would be misleading
and would lead to serious mistakes. Thus, Moody’s,
following analytical principles, deals with several relevant
risk factors (including quantitative ratios as an objective
and factual starting), building scenarios and relying on
the judgment of a diverse group of credit risk
professionals to weight those factors and establish the
ratings.
Another popular way of evaluating risk is the system
of risk assessment of various countries through the so-
called “BERI index”, developed by the Swiss company
of the same name. This abbreviation stands for “Business
Environment Risk Intelligence”. The evaluation system
is based on giving each type of risk a certain weight
reflecting its importance to the success of a business
and the level of risk rating scale from 0 (very high risk)
to 4 (lowest risk). For convenience, the sum of
coefficients is reduced to 25 points, so that the country,
the least risky in all respects, has a chance to get a total
N. O. Potyomkina, E. S. Voshchyna, M. M. Breiman
UDC 330.131.7:338.124.4
N. O. Potyomkina,
PhD (Economscs)
E. S. Voshchyna,
M. M. Breiman,
Donetsk National Technical University
CURRENT APPROACHES TO COUNTRY RISK ANALYSIS
International and Regional Economics
19
Економічний вісник Донбасу № 4 (34), 2013
of 100 points, the most risky and will have the least amount
of points approaching zero. Scheme for the construction
of the integral index BERI is displayed in the table 3.
BERI index is provided for 140 countries worldwide.
Professionals working in each region present their
estimates three times a year. Experts of the company
through a special computer programs analyze large
amounts of statistical information for each country, with
which the index is calculated. Next, expert opinions and
statistical data compiled by experts of the company and
reduced to the overall country index. This allows the
company to forecast BERI degree of country risk in the
long term of 1 to 5 years. Similarly, the company is
building BERI indices to evaluate individual risks. As these
private ratings BERI gives the index of political, financial
and operational risk. In the private ratings the same criteria
are used, but in smaller numbers and with increasing
coefficients.
Comparative rating systems, using similar
methodology, are developed by consulting firms Frost &
Sullivan (Rating World Political Risk Forecast), Business
International and Data Resources Inc. (rating Policon)
and many others. Most of them are available online.
Another widely used country risk rating system is
provided by the magazine “Euromoney” and is called
“Euromoney’s Country Risk Index”. It is determined by
the score of 9 parameters, each of which has a certain
weight in the overall rankings. Overall rating describes
N. O. Potyomkina, E. S. Voshchyna, M. M. Breiman
Table 1
Credit ratings by investment agency Moody’s [4]
Grade Meaning of the grade
Aaa Best quality
Aa High quality
A Upper medium grade
Baa Medium grade
Ba Possess speculative elements
B Generally lack characteristics of a desirable investment
Caa Poor standing: may be in default
Ca Speculative in a high degree; often in a default
C Lowest grade; extremely poor prospects
Table 2
Credit ratings by investment agency Standard & Poor’s [5]
Grade Meaning of the grade
AAA Highest rating: extremely capacity to pay interest/principal.
AA Very strong capacity to pay
A Strong capacity to pay
BBB Adequate capacity to pay
BB Uncertainties that could lead to inadequate capacity to pay
B
Greater vulnerability to default, but currently has capacity to
pay.
CCC Vulnerable to default
CC For debt subordinated to that with CCC rating
C
For debt subordinated to that with CCC – rating or
bankruptcy petition has been filed
D In payment default
20
Економічний вісник Донбасу № 4 (34), 2013
the economic opportunity of the country to pay for the
borrowing of funds. The maximum final grade for the
country is 100.
The structure of the credit rating by “Euromoney”
includes following indicators:
• political risk (25% weight in the overall ranking);
• economic outlook (25% weight);
• 3 financial indicators (10% weight in the overall
rating for each);
• 4 bank indicators (each of 5% of the weight in
the overall rankings.)
The rating is made twice a year, in March and
September, and now covers more than 180 countries [6].
1. Political risk. These are the most common
categories: the possibility of non-payment for the supply
of goods and services, the non-payment of loans, financial
liabilities, dividends, and the impossibility of repatriation
of invested capital. The lower the risk, the higher the
ranking score. In this case, the maximum possible
amount of points is 25.
2. Economic perspectives (Economic performance).
The index is based on the predictions of the countries in
this and next year. The maximum possible amount of points
is 25. Economic data for the ranking is compiled from a
review of 35 economists from major banks, financial and
economic institutions.
3. Indicator of external debt (Debt Indicator). The
maximum possible amount of points is 10. Estimates for
this parameter are taken on the basis of the World Bank's
“Global Development Finance”.
4. Debt in connection with the default or in
connection with the restructuring of debt (Debt in default
or rescheduled). The highest score (10 points) is received
by those countries which did not have non-payment. Zero
is assigned to the country, which has had the failure of
all financial obligations or term of payment was moved
across the debt. Estimates are based on the source of the
World Bank “Global Development Finance”.
5. Credit rating or credit rating of solvency debts
(Credit rating). Credit ratings are taken as the average of
the ratings by “Moody’s” and „Standart & Poor’s”.
Countries without a rating receive a rating of 0, while
those with only short-term ratings receive estimates based
on the rating of BBB. The highest score for the most
creditworthy countries is 10.
6. Access to banking resources (access to bank
finance). This is calculated by experts as a percentage of
private, long-term, unsecured loans to GDP. In the best
variant the maximum number of points reached is 5.
7. Access to short-term financial resources (access
to short-time finance).
8. Access to capital markets (access to capital
markets). The highest rating is given to those countries
that were able to get the resources from the capital
markets, the zero mark - if access was completely
impossible.
9. Access to forfeiting services (Discount on
forfaiting).
Overview of country risk analysis systems given in
this article is far from being complete. There exist many
other rating systems, evaluated by different agencies,
magazines, universities, etc.
Ukrainian performance
All three major international credit rating agencies –
Moody’s, Standard & Poors and Fitch assign their
sovereign credit ratings to Ukraine. Latest Ukrainian credit
rating by Moody’s was assigned on 05.12.2012 and is
B3. Moody’s explained downgrade of the rating by “low
institutional sustainability, lack of external liquidity and
negative forecast for Ukrainian economy in general” [7]
Historical evolution of this rating is presented in a following
table.
According to the Euromoney Country Risk results
for June 2011 [10], Ukraine scores 44.08 out of 100
points which corresponds to the 85-th place in the rating
of 186 countries.
Results of the different country risk ratings listed
above can be interpreted by the international investor as
relatively poor, which is unfavorable for the future of the
Ukrainian economy. Main reasons for such a low
performance are political risks connected with political
instability, various economical risks mainly due to
insufficient protection of private capital, insufficient
government control of financial sector, imperfection of
the law base. Other important problem, affecting country
risk of Ukraine in latest years is growing sovereign debt.
Rating agencies note lack of financial stability,
unwillingness to introduce necessary reforms, structural
weaknesses [11].
Conclusion
Analyzing the country risk is an important part of
the investment process. Usually such analysis is held on
the early stages of the investment process. Latest political
and economic events, particularly debt crisis's in Greece
and Cyprus underline the importance of such analysis –
as many investors already lost their money in one country
and are likely to lose in the other one.
Professional analysis of country risk is usually held
by specific global institutions with required competence –
rating agencies. Three leading companies on these market
are Moody’s, Standard & Poors and Fitch. All of them
provide ratings in form of letter grades accordingly to
their own grading tables. Different methodology is used
to form these ratings – one way is to analyze and compare
different variables with peer countries, and the other – to
collect opinions of experts from the region under review.
Besides these rating agencies, there are many other
competent organizations providing there all ratings. In
this article, in particular, the BERI country risk and the
Euromoney country risk indexes are examined. Those
are more complex and cover different types of risk.
Political and economic risks are separated from each
N. O. Potyomkina, E. S. Voshchyna, M. M. Breiman
21
Економічний вісник Донбасу № 4 (34), 2013
other, and both expert opinions and measurable indicators
are taken into account.
Because ratings of country risk are considered by
investors, it is an important question how well does
Ukraine perform in these ratings. Ukrainian results are
relatively low. In rating agencies ratings Ukraine never
reaches “investment grade” zone, which is preferred by
investors. In 2011 Euromoney country risk rating it only
scores 44 points out of 100, which is not a favorable
result. Possible reasons, according to rating agencies,
are structural problems, weakness of the important
institutions and political instability.
References
1. The wait is over – The Economist – available at
http://www.economist.com/node/21550271 [Electronic
resourse]. 2. 2012 – 2013 Cypriot financial crisis –
Wikipedia – available at http://en.wikipedia.org/wiki/2012-
2013_Cypriot_financial_crisis [Electronic resourse].
3. Denise Roland, Rachel Cooper – Cyprus bail-out: as
it happened – March 25, 2013 – The Telegraph – available
at http://www.telegraph.co.uk/finance/debt-crisis-live/
9951727/Cyprus-bailout-live.html [Electronic resourse].
4. Moody’s Rating Symbols & Definitions – Mood’s –
available at http://www.moodys.com/sites/products/
AboutMoodysRatingsAttachments/MoodysRatings
Symbolsand%20Definitions.pdf [Electronic resource].
5. Credit Ratings Definitions & FAQs – Standard &
Poors – available at http://www.standardandpoors.com/
ratings/definitions-and-faqs/en/us [Electronic resource].
6. About Euromoney’s Country risk ratings – Euromoney –
available at http://www.euromoney.com/Poll/10683/
PollsAndAwards/Country-Risk.html [Electronic
resource]. 7. Moody’s понизило кредитный рейтинг
Украины – Корреспондент – available at http://
korrespondent.net/business/economics/1434290-
moodys-ponizilo-kreditnyj-rejting-ukrainy [Electronic
resource] (Moody’s downgraded the credit rating of Ukraine).
8. Rating: Ukraine Credit Rating – Countryeconomy –
available at http://countryeconomy.com/ratings/ukraine
[Electronic resourse]. 9. S&P понизило суверенный
рейтинг Украины – Корреспондент – available at http://
N. O. Potyomkina, E. S. Voshchyna, M. M. Breiman
Table 3
The structure of the integral BERI index
Criterion Wage
Political stability 3
Treatment of foreign investors and their profits 1.5
Risk of nationalization 1.5
The devaluation of the national currency 1.5
Balance of payments 1.5
Bureaucratic barriers 1
Economic growth 2.5
Convertibility of currency 2.5
Ability to implement and contracts trials 1.5
Labor costs and labor productivity 2
The presence of experts and expertise 0.5
Communication and transport 1
The availability of local managers and partners 1
The possibility of short-term loans 2
The possibility of long-term loans and the availability of equity capital 2
Overall 25
Table 4
The structure of the integral BERI index
Date Rating
06.02.1998 B2
09.09.1998 B3
05.01.2000 Caa1
24.01.2002 B2
10.11.2003 B1
08.08.2008 B1
12.05.2009 B2
05.12.2012 B3
22
Економічний вісник Донбасу № 4 (34), 2013
N. O. Potyomkina, E. S. Voshchyna, M. M. Breiman
korrespondent.net/business/economics/1434943-sandp-
ponizilo-suverennyj-rejting-ukrainy [Electronic resource]
(S&P downgraded Ukraine’s sovereign rating).
10. Euromoney Country Risk Results, June 11 –
Euromoney – available at – http://www.euromoney
countryrisk.com/Documents/fac29cf8-35d6-4520-8479-
eb1677cdc5cb/whitepaper/ECR%20Results%20Table
%20June%202011.pdf [Electronic resourse]. 11. Moody’s
назвало факторы, сдерживающие суверенные рейтин-
ги стран СНГ – Корреспондент – available at – http://
korrespondent.net/business/rynki/1537219-moodys-
nazvalo-faktory-sderzhivayushchie-suverennye-rejtingi-
stran-sng [Electronic resourse] (Moody's defined factors,
restraining sovereign ratings of the CIS countries).
Потьомкіна Н. О., Вощина Є. С., Брейман М. М.
Сучасні підходи до аналізу ризику країни
В статті розглянуто різні підходи щодо оцінюван-
ня ризику країни, рейтинги, що складаються профе-
сійними рейтинговими агентствами, шкали, що ними
використовуються. Проаналізовано методи, що вико-
ристовуються для створення рейтингів ризику країни.
Розглянуто питання щодо позиції, що займає Україна
у світових рейтингах, причинах знаходження на цій
позиції.
Ключові слова: ризик країни, інвестор, рейтинг,
підхід, експертна оцінка, політичний ризик, криза.
Потемкина Н. А., Вощина Е. С., Брейман М. М.
Современные подходы к анализу странового риска
В статье были рассмотрены различные подходы
к оценке странового риска, рейтинги, составляемые
профессиональными мировыми рейтинговыми аген-
ствами, шкалы, используемые ими. Проанализирова-
ны методы, применяемые для составления рейтингов
странового риска. Рассмотрен вопрос о позиции, за-
нимаемой Украиной в мировых рейтингах, причинах
нахождения на этой позиции.
Ключевые слова: страновой риск, инвестор, рей-
тинг, подход, экспертная оценка, политический риск,
кризис.
Potyomkina N. O., Voshchyna E. S., Breiman M. M.
Current Approaches to Country Risk Analysis
This article deals with the topic of country risk
analysis. Different approaches to this problem, ratings
developed by international rating agencies and their
grades were examined. Ukrainian performance in these
ratings was examined, as well as reasons of such
performance.
Key words: country risk, investor, rating, approach,
expert's opinion, political risk, crisis.
Received by the editors: 25.09.2013
and final form 04.12.2013
Table 5
The structure of the integral BERI index
Date Rating
13.06.2001 B-
26.03.2002 B
25.06.2003 B+
21.01.2005 BB-
08.06.2005 BB-
12.01.2006 BB-
25.10.2006 BB-
14.05.2008 BB-
25.09.2008 BB-
17.10.2008 B+
13.02.2009 B
12.11.2009 B-
17.03.2010 B-
06.07.2010 B
21.07.2011 B
02.09.2011 B
19.10.2011 B
26.04.2012 B
18.07.2012 B
09.08.2012 B
08.03.2013 B
|
| id | nasplib_isofts_kiev_ua-123456789-123373 |
| institution | Digital Library of Periodicals of National Academy of Sciences of Ukraine |
| issn | 1817-3772 |
| language | English |
| last_indexed | 2025-11-27T15:39:14Z |
| publishDate | 2013 |
| publisher | Інститут економіки промисловості НАН України |
| record_format | dspace |
| spelling | Potyomkina, N.O. Voshchyna, E.S. Breiman, M.M. 2017-09-03T18:58:54Z 2017-09-03T18:58:54Z 2013 Current Approaches to Country Risk Analysis / N.O. Potyomkina, E.S. Voshchyna, M.M. Breiman // Економічний вісник Донбасу. — 2013. — № 4 (34). — С. 18–22. — Бібліогр.: 11 назв. — англ. 1817-3772 https://nasplib.isofts.kiev.ua/handle/123456789/123373 330.131.7:338.124.4 This article deals with the topic of country risk analysis. Different approaches to this problem, ratings developed by international rating agencies and their grades were examined. Ukrainian performance in these ratings was examined, as well as reasons of such performance. В статті розглянуто різні підходи щодо оцінювання ризику країни, рейтинги, що складаються професійними рейтинговими агентствами, шкали, що ними використовуються. Проаналізовано методи, що використовуються для створення рейтингів ризику країни. Розглянуто питання щодо позиції, що займає Україна у світових рейтингах, причинах знаходження на цій позиції. В статье были рассмотрены различные подходы к оценке странового риска, рейтинги, составляемые профессиональными мировыми рейтинговыми агентствами, шкалы, используемые ими. Проанализированы методы, применяемые для составления рейтингов странового риска. Рассмотрен вопрос о позиции, занимаемой Украиной в мировых рейтингах, причинах нахождения на этой позиции. en Інститут економіки промисловості НАН України Економічний вісник Донбасу International and Regional Economics Current Approaches to Country Risk Analysis Сучасні підходи до аналізу ризику країни Современные подходы к анализу странового риска Article published earlier |
| spellingShingle | Current Approaches to Country Risk Analysis Potyomkina, N.O. Voshchyna, E.S. Breiman, M.M. International and Regional Economics |
| title | Current Approaches to Country Risk Analysis |
| title_alt | Сучасні підходи до аналізу ризику країни Современные подходы к анализу странового риска |
| title_full | Current Approaches to Country Risk Analysis |
| title_fullStr | Current Approaches to Country Risk Analysis |
| title_full_unstemmed | Current Approaches to Country Risk Analysis |
| title_short | Current Approaches to Country Risk Analysis |
| title_sort | current approaches to country risk analysis |
| topic | International and Regional Economics |
| topic_facet | International and Regional Economics |
| url | https://nasplib.isofts.kiev.ua/handle/123456789/123373 |
| work_keys_str_mv | AT potyomkinano currentapproachestocountryriskanalysis AT voshchynaes currentapproachestocountryriskanalysis AT breimanmm currentapproachestocountryriskanalysis AT potyomkinano sučasnípídhodidoanalízurizikukraíni AT voshchynaes sučasnípídhodidoanalízurizikukraíni AT breimanmm sučasnípídhodidoanalízurizikukraíni AT potyomkinano sovremennyepodhodykanalizustranovogoriska AT voshchynaes sovremennyepodhodykanalizustranovogoriska AT breimanmm sovremennyepodhodykanalizustranovogoriska |