Naz Naini and Rob Vaughan talk about the quarter one 2013 update and what these findings mean for business.
Woman - Naz Naini
Country risk is faced by UK businesses exporting to, investing in and operating in foreign territories. In this short video we examine how recent global trends have reflected these exposures over the past year and what to expect over the coming months.
Man – Rob Vaughan
The downgrade to the UK’s growth expectations in the Chancellor’s March Budget has highlighted the need for UK companies to trade their way out of a downturn and to expand into external markets. But alongside the potential for higher returns, comes high risks. Cash flows can be more volatile and this could be made worse by large exchange rate swings. Over the last few quarters our country risk rating show that emerging markets are viewed as more risky and more volatile than their developed market peers.
For those companies actively operating in external markets, it's not just economic risk factors that are important. Events over the past 12 months have shown that Government and political risk factors can create conditions that make it very difficult for businesses to perform well in. The crisis in Cyprus has also shown that small territories can cause big problems for businesses.
Another noticeable trend is that Governments around the world previously considered safe have seen their credit ratings cut. But at the same time investors have continued to keep faith in their bond markets and their borrowing costs have continued to fall despite the downgrade. This shows that UK businesses need to consider a wider range of indicators than just credit ratings alone when making their foreign investment decision.
Disappointing economic performance in developed countries is likely to see businesses push further into emerging markets over the next 12 months. Whilst returns may appear attractive we recommend a closer evaluation of a country's underlying risk before deciding which territories to expand into. Our latest Quarter One 2013 results show that even countries that are close geographically can be very far apart in terms of risk. We have been looking at country risk for over 15 years, our services covering over 180 sovereign states can help businesses to translate these concerns into the potential impact on cash flows.
Naz Naini gives an overview of what country risk is, why it's relevant for your business and our services in this area.
So what is country risk? It is a measure of risk faced by businesses when investing in sovereign states and it reflects a number of factors including:
It is effectively the risk of those low probability, high impact events that can lead to significant losses in the value of investments. Now more than ever these types of risk are at the forefront of many investors thinking due to a number of major economic and geo-political events, such as the Eurozone sovereign debt crisis and also events in the Middle East and North Africa, all of which have led to previously stable countries becoming much riskier.
Country risk is changing all the time and in some cases we have seen a complete reversal of historical trends, for example, in 2008 Brazil's risk rating was higher than Portugal. In recent years we have seen a complete reversal of this trend. For certain countries we have also seen a major disconnect between the country risk based on actual bond yields and those implied by the risk ratings. So for all of these reasons measuring and accounting for country risk whether it be for international investment appraisals or valuation of multi-national companies is more essential and more challenging than ever before.
Our economics team has been analysing and measuring country risk for 15 years and covers over a 180 sovereign states. For more information about country risk and our services please take a look at our website.
Our interactive map, above, shows just how much country risk has evolved over the past decade. Some countries have become much riskier to operate in, whilst others have seen their risk levels fall. An analysis of country risk trends can help organisations identify these risks and opportunities early on in their planning processes.
For UK companies that have international operations or are considering opportunities abroad, managing and accounting for country risk will be a key consideration. Our country risk service can help companies to quantify and manage such risks in order to make better business decisions.
Our country risk service can help companies to quantify and manage such risks in order to make better business decisions.
We calculate Country Risk Premiums (CRPs) for 187 sovereign nations using an economic model that we have developed since 1998. Our model uses a range of inputs in generating CRPs, including reliable sources of credit and risk ratings and sovereign bond information.
For more information, please contact a member of the team.