risk rating

March 29, 2018 | Author: Shashank Mangal | Category: Credit Rating Agency, Foreign Direct Investment, Governance, Competitiveness, Risk
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Country Risk AnalysisSOVEREIGN RISK RATING March 2008 MH BOUCHET/CERAM-Global Finance Various approaches to country risk assessment Qualitative analysis: financial, macroeconomic, legal, regulatory and political parameters; COFACE, Nord/Sud Export, EIU, IIF  Quantitative approach : rating and scoring  Econometric approach and modelization  Analytical approach: crisis typology (Indosuez)  Principal Component Analysis  Logit Analysis  Non-linear conditional analysis (threshold levels & breaking points: TAC)  MH BOUCHET/CERAM-Global Finance Specialized Country Risk Rating institutions             BERI (Business Environment Risk Index) Dun and Bradstreet, Moody ’s, S & P, Fitch Institutional Investor Frost & Sullivan Euromoney Fraser Instiotute Credit Risk International (Paris) International Country Risk Guide (NY/London) Coface & Ducroire Heritage Foundation Transparency International DBRS: http://cache.dbrs.com/pdf/20752303634573.pdf?transactionID=421961 MH BOUCHET/CERAM-Global Finance Quantitative approach: Rating  Means: Transforming a number of observations (Delphi method, surveys) or quantitative indicators into one number.  The various indicators can be weighted regarding their impact on creditworthiness and risk.  End-product: one single grade to assess past and current country risk situation with possible crosscountry comparisons across time MH BOUCHET/CERAM-Global Finance Country Risk Ratings Advantages/ Pros      Simple cross-country comparison comparison across time shrinks a large number of variables into one single grade Reliable for smooth risk evolution Shortcomings/Cons  “reductionist”  oversimplistic  risk of self-fulfilling prophecy  little predictive value  weighted average tends to bury salient trends  Gives “market consensus” often made of herd instinct MH BOUCHET/CERAM-Global Finance . The goal is to overcome asymmetric information between both market sides by using standardized quality assessement methods. hence followjng the majority opinion of market participants without any early warning signals nor predictability track record MH BOUCHET/CERAM-Global Finance .       Rating agencies are to be independent third parties that are consulted in the course of a market transaction.Shortcomings of rating agences Kuhner. January 2001) (C.  Criticisms: * Power without accountability * Conformity bias * Sociocultural bias * Punishment of disobedient firms/countries that do not request a rating * Procyclical bias. Schmalenbach Business review. LTCM.M Keynes MH BOUCHET/CERAM-Global Finance .(in the case of Fitch IBCA and S&Ps) or A1 (in the case of Moody’s) before the crisis. was clearly either wrong initially or subsequently. Clients are entitled to expect us to perform better in the future!” Fitch IBCA January 13.Asia. 1998  “When the facts change. US Subprime crises: some lessons to learn?  “Any agency which rated the Republic of Korea at the high investment grade rating of AA. and which now rates Korea at a speculative grade B-. I change my mind” J. Rating = poor early warning signals?  South Korea wa s rated as Italy and Sweden as late as October of 1997! But abrupt downgrading to junk bond status during the crisis  « There were no early warnings about Korea from us or. from other market participants and our customers should expect a better job from us »  FICHT IBCA January 14. 1998 MH BOUCHET/CERAM-Global Finance . to the best of our knowledge. The Perceived Situation  Was the crisis anticipated by rating agencies? Credit Ratings Indonesia Korea Malaysia Philippines Thailand Standard & Poor' s June 1996 June 1997 BBB BBB AAAAA+ A+ BB BB+ A A Moody' s June 1996 June 1997 Baa3 Baa3 A1 A1 A1 A1 Ba2 Ba1 A2 A2 MH BOUCHET/CERAM-Global Finance . EUROMONEY’s Risk Rating 1996 Korea Thailand Philippines 1997 30 51 1998 42 54 1999 44 49 2000 29 65 2006 37 57 2007 38 60 28 45 55 33 45 57 35 49 55 56 91 53 46 98 78 46 107 80 46 85 78 49 81 Malaysia Indonesia MH BOUCHET/CERAM-Global Finance . Quantifying Country Risk Political Factors Weights 30% Overall Country Risk Rating 70% Transfer Risk Rating Political Risk Rating Political factor A Political factor B Political factor C 30% 50 20 Financial Factors Weights Financial factor A Financial factor B Financial factor C 30% 40 30 MH BOUCHET/CERAM-Global Finance . Country Risk Rating  Foreign investment risk decision matrix – combines ratings of financial and political risk Low Political Risk Acceptable Zone High High risk Zone High Low Decision depending on market and profit potential Financial Risk MH BOUCHET/CERAM-Global Finance . Moody’s Sovereign Ratings 02/2008 MH BOUCHET/CERAM-Global Finance . Moody’s economic and financial Risk indicators: Argentina end-2007 MH BOUCHET/CERAM-Global Finance . portfolio investment. including FDI. MH BOUCHET/CERAM-Global Finance . consultancy contracts…. lending. exporting and importing.Country risk ratings? Country risk analysis cannot & should not be boiled down to bond rating! Risk might stem from a wide range of strategies. T.beri. California-based) www.Quantitative Country Risk Appraisal Methods  BERI: Business Environment Risk Index (F. currency and repayment risk.com Swiss-based private source for risk rating on over 130 countries  created in the late 1960s.  FORELEND reports (Forecast of Country Risk for International Lenders)  MH BOUCHET/CERAM-Global Finance . the oldest risk assessment service. political stability. Haner. Delphi Method with a panel of 105 international experts rating 15 criteria for current and medium-term business horizon  3 components of country risk: business climate.  Two risk indexes three times a year: ORI Operations Risk Index and PRI Political Risk Index.BERI S. financial.A. monetary.  Economic. operating and political conditions are integral components of the 0 (worst case) to 100 (best case) system for assessing countries. with forecasts for +1 year and +5 years. Output: Remittance and repatriation Factor: the R Factor. MH BOUCHET/CERAM-Global Finance . Worst country ratings  Venezuela  Pakistan  Colombia  Indonesia  Ecuador  Nigeria  Ivory Coast  North Korea MH BOUCHET/CERAM-Global Finance .BERI S.A. both OECD and EMCs Rating Methodology: Panel of 32 leading economists in international financial institutions evaluing country performance in the financial markets (market access. terms and maturity…)  Scoring between 100 (excellent) and 0 (considerable risk)  + Panel of political analysts to measure short-term risk of destabilization  MH BOUCHET/CERAM-Global Finance .Euromoney Semi-annual country risk scoring of 185 countries. selldown. spreads. In between. the lowest receives 0. Credit ratings (10%). Categories = Economic performance (25% weighting). Access to bank finance (5%). • MH BOUCHET/CERAM-Global Finance • . Political Risk (25%). Debt in default or rescheduled (10%). figures are calculated according to the formula: final score = (weighting / (maximum score-minimum score)*(maximum score-minimum score). Debt indicators (10%).Euromoney • • Euromoney establishes an overall score for countries using nine weighted categories which are calculated as follows: the highest score in each category receives the full mark for the weighting. Access to short-term finance (5%). The ranking shows the final scores after weighting. Access to capital markets (5%) and Discount on forfaiting (5%). Rating: EUROMONEY          Growth performance: 25% (GDP projections) Political risk: 25% External debt indicators: 10% (debt/GDP et debt/X) External payment default and rescheduling: 10% Credit rating Moody ’s or S&P: 10% Short-term credit market access: 5% Commercial bank MT credit: 5% Capital markets access: 5% Spread over US Treasury bills: 5% MH BOUCHET/CERAM-Global Finance . EUROMONEY: end-2007 Rating 1= Luxemburg  2. Norway  3. Switzerland  14= France  19= Japan  26= HongKong  28= Taiwan  42= Poland  44= Chile  50= Mexico  54= China  62= Tunisia  65= Morocco  69= Egypt  79= Algeria  184= North Korea  MH BOUCHET/CERAM-Global Finance . EUROMONEY: Country Risk Rating             End-2001 14= Singapore 28= Taïwan 30= HongKong 40= Chile 39= Hungary 40= Brunei 42= Poland 45= China 56= Malaysia 89= Romania 93= Bulgaria 163= Congo             End-2005 9= Ireland 19= Singapore 22= New Zealand 35= Hungary 58= China 73= Iran 74= Vietnam 77= Russia 85= Algeria 96= Indonesia 127= Ivory Coast 182= Cuba 2007 20=Singapore 41=Hungary 42= Poland 54= China 57= Russia 76= Vietnam 77= Algeria 79= Iran 85= Indonesia 167= Ivory Coast 178= Congo 182= Cuba 185= North Korea MH BOUCHET/CERAM-Global Finance . 8 9 De c.99 ar ch 20 00 Se pt .03 Se pt .01 Se pt .EUROMONEY Risk Rating: Ivory Coast 180 160 140 120 Rank Higher Risk 100 80 60 40 20 0 19 85 M ar ch 87 Se pt . 97 M ar ch 98 Se pt .05 M ar ch 06 MH BOUCHET/CERAM-Global Finance Coup d’état Lower Risk Political upheaval 19 80 19 81 19 82 19 84 .9 8 M ar ch 99 Se pt M .0 2 M ar ch 03 Se pt . Taiwan. Benin. Sudan. Chile Worst: Cuba. Iraq. North Korea. United Kingdom. Nigeria. Netherlands. France. Albania. United States. Luxembourg… Singapore. Congo.Scoring/Rating of Country Risk Institutional Investor    0-100 semi-annual Rating of 136 countries’ creditworthiness based on survey of 100 leading international bankers Best : Switzerland. Germany. Angola II Global average rating as of March 2000 = 41 II Global average rating as of March 2007 = 45   MH BOUCHET/CERAM-Global Finance . Sierra Leone. with 100 representing those countries with the best creditworthiness. The names of all participants in the survey are kept strictly confidential.Institutional Investor Risk Rating • • • • Risk information provided by leading international banks. The sample for the study. The individual responses are weighted (> importance to responses from banks with greater worldwide exposure and more sophisticated country analysis systems) MH BOUCHET/CERAM-Global Finance . ranges from 75 to 100 banks. Banks are not permitted to rate their home country. Bankers are asked to grade each of the countries on a scale from 0 to 100. updated every six months. 0 7 .8 De 9 c. 98 ar ch 99 Se pt M .Rank 100 120 140 160 180 20 40 60 80 0 Higher Risk Lower Risk FCFA devaluation Institutional Investor Risk Rating 1981-2007 Ivory Coast MH BOUCHET/CERAM-Global Finance Coup d’état Se pt M .0 M ar 6 ch 0 Se 7 pt .81 ar ch 8 M ar 2 ch 8 Se 7 pt .9 ar ch 9 2 M ar 000 ch 2 M ar 002 ch 2 M 003 ar ch 0 M ar 4 ch 0 Se 5 pt M . 05 ar ch 0 Se 6 pt . 97 M ar ch 9 Se 8 pt M . Institutional Investor: 2007 rating Switzerland 2. Norway 3. Luxemburg 4. Netherlands 5. Finland 6. Germany 13. France 17. Spain 21. Italy 1.              60. Tunisia 67. Morocco 68. Algeria 72. Egypt 78. Venezuela 91. Argentina 117. Bolivia 124. Gabon 134. Cameroun 153. Congo 157. RCI 166. Iraq 171. Zimbabwe MH BOUCHET/CERAM-Global Finance Institutional Investor 2007 Risk Rating of ASIA          Singapore= 16 Australia= 18 Hongkong= 24 Taiwan= 26 South Korea= 28 China= 34 Malaysia= 38 Thailand= 54 India= 58          Philippines= 73 Indonesia= 76 Vietnam= 77 Pakistan= 86 Sri Lanka= 100 Laos= 132 Cambodia= 140 Myanmar= 168 North Korea= 173 MH BOUCHET/CERAM-Global Finance Institutional Investor (2007 rating) From Best to…. Switzerland, Norway, UK, Germany, USA, Sweeden Netherlands, France, US Austria, Canada, Singapore, Australia, Japan Denmark, Belgium, Canada Greece, Chile, Spain, Kuwait Italy, Taiwan, HK, China Worst Congo, Afghanistan, Mali Chad, Togo, Cambodia Yugoslavia, Cuba, RCI Albania, Haiti, Angola, Iraq, N. Korea, Sudan Nicaragua, Cuba, Zambia, Togo, Ethiopia, Myanmar, Liberia, Somalia, Zimbabwe MH BOUCHET/CERAM-Global Finance Institutional Investor Risk Rating 180 160 140 120 100 80 60 40 20 ch ar M ch ar M ch ar M se ch ar M De 81 c. De 97 c. m s ar 8 -9 . pt Se 98 m s ar 9 -9 . pt Se 99 . pt Se 03 . pt Se 05 6 -0 pt 00 04 06 07 Ivory Coast Brazil Ukraine Algeria Chile Russia Mexico MH BOUCHET/CERAM-Global Finance 9 pt Se m s ar 9 -9 . pt Se 99 3 .0 pt Se 5 .Institutional Investor Risk Rating 1981-2007 180 160 140 120 100 80 60 40 20 ch ar M ch ar M ch ar M se ch ar M De 81 c.0 pt Se 6 -0 pt 00 04 06 RCI Russia 0 MH BOUCHET/CERAM-Global Finance . m s ar 8 -9 8 . De 97 c. 0 to 49. Very High Risk 00. according to a formula. Each Risk Category is made up of a number of Risk Components. to produce a Composite Risk Rating.0 to 69.0 to 100 points High Risk 50. Economic and Financial.5 points Moderate Risk 60.5 points • • • MH BOUCHET/CERAM-Global Finance .International Country Risk Guide • The ICRG Risk Rating System assigns a numerical value (risk points) to a predetermined range of risk components according to a preset weighted scale for each country covered by the system (PRS) The risk components are grouped into 3 categories .0 to 59. The total Risk Points for each Risk Category are further combined.0 to 79. The sum of the Risk Points assigned to each Risk Component within each Risk Category determines the overall risk for that category.Political.5 points Very Low Risk 80.5points Low Risk 70. International Country Risk Guide: RCI 70 65 FORECAST 60 Rating 55 50 Coup d’état 45 40 avr-99 mai-99 juin-99 juil-99 août-99 sept-99 oct-99 nov-99 déc-99 janv-00 févr-00 mars-00 avr-00 spt-00 sept-01 sept-02 sept-03 2006 Composite Political. Financial and Economic Risk Rating with weighted average MH BOUCHET/CERAM-Global Finance . e. The Country Risk Classification Method uses an econometric model based on quantitative indicators. the likelihood that a country will service its external debt. The Country Risk Classification Method measures the country credit risk.fr_2649_34169_1901105_1_1_1_1.org/document/49/0.00.OECD Credit rating 1997 Knaepen Package= convergence on the pricing of officially supported medium and long term export credits. e.oecd.g.html MH BOUCHET/CERAM-Global Finance .2340. One of the key elements of the Knaepen Package is a system for assessing country credit risk and classification of the countries into 7 categories. e. political and other economic and financial factors not included in the quantitative Econometric Model. http://www. i. the financial and the economic situation and the payment experience of the countries and takes account of possible qualitative factors. The details of the Country Risk Assessment Model are confidential and not published.g. The sub-Group of Country Risk Experts meets several times a year. based only on valid country risk elements. These meetings are organized so as to guarantee that every country is reviewed each time a fundamental change is noticed and at least once a year. The meetings are confidential and no official reports of the deliberations are made. 8 country risk categories from 0 (no risk) to 7 (high risk) MH BOUCHET/CERAM-Global Finance .OECD Credit rating The final classification. is a consensus decision of the sub-Group of Country Risk Experts that involves the country risk experts of the Participating Export Credit Agencies. OECD Country risk classification in 2008 0 Greece Austria Belgium Canada France USA UK 1 Czech Rep HongKong 2 Chile China Hungary Poland 3 Israel Algeria Morocco South Africa 4 5 6 Albania 7 Bolivia Haiti Cambodia Cameroon Brazil Philippines Pakistan Indonesia Peru Panama Niger Nigeria Argentina Trinidad Thailand Vietnam & Russia Tobago Romania Kuwait Mexico Mexico Bulgaria Malaysia MH BOUCHET/CERAM-Global Finance Guatemala Gabon RCI . COFACE 140 countries Country rating definition:        Investment grade A1= steady economic and political situation A2= weak default probability A3= adverse circumstances may lead to worsening payment record A4= patchy payment record could be worsened by adverse economic/political developments  Speculative grade: B= unsteady economic and poltical environment C= bad payment record D= high risk profile and very bad payment record  MH BOUCHET/CERAM-Global Finance . Coface credit Rating (2008)                 Canada= A1 Australia= A1 USA= A1 Japan= A1 Chile= A2 Korea= A2 Thaïland = A3 China = A3 Mexico = A3 India = A3 Croatia=A3 Poland = A3 Roumania =A4 Tunisia= A4 Algéria = A4 Brazill= A4       Cameroun= B Égypt = B Russia= B Indonésia= B Turkey = B Ukraine= C Congo= C Argentina = C Iran= D Venezuela= D RCI= D Nigeria= D       MH BOUCHET/CERAM-Global Finance . 3 4.2 14.8 -2.2 -2.5 16.8 63 11.6 14.Tunisia: Macroeconomic indicators source: Coface Mds $ 2003 5.7 -3.7 -3.7 11 2.2 Croissance économique (%) Inflation (%) Solde public/PIB (%) Exportations Importations Balance commerciale Balance courante/PIB (%) Dette extérieure/PIB (%) SD/Export b&s (%) Réserves en mois d'import.9 81.4 8 10.5 -2.3 -2.8 11.1 75 13.7 12.5 4.7 3 -2. 2.3 -2.3 -2.5 -2.6 -2.5 12.2 4.5 14 -2.5 17.8 3.7 MH BOUCHET/CERAM-Global Finance .9 83.7 13.7 3.1 -2.4 -1.4 2007(e) 6 2008(p) 6.6 2004 6 2005 4 2006e 5.3 70 17.5 3 2 -3 10.6 9.5 67 12.5 3 -2.5 -2 1.3 4. Coface: Payment arrears index in Tunisia (index 100= 1995) MH BOUCHET/CERAM-Global Finance . tourism. from foreign direct investment to international travel. FDI.AT KEARNEY: the globalizaton index Index that measures a country’s global links. secure servers) – Personnal contact (international travel. participation in UN missions. Internet hosts. international telephone traffic. cross-border transfers) – Political engagement (foreign embassies. receips) – Technology (number of Internet users. and Internet servers  Indicators combined into 4 sub-categories:  – Economic integration (trade. number of memberships in international organisations) MH BOUCHET/CERAM-Global Finance . income payments. telephone traffic. portfolio capital flows. The Globalization index 2001 Ireland United States Chile Argentina Brazil Morocco France Japan Russia China 6 12 2002 1 12 2003 1 11 2004 1 7 26 39 44 42 16 29 45 48 34 44 58 46 13 38 39 53 MH BOUCHET/CERAM-Global Finance 31 48 57 29 12 35 45 51 34 44 58 46 15 38 39 53 . UK  13. Iran  MH BOUCHET/CERAM-Global Finance ATKearney . China  62. Finland  11. Denmark  8. Malaysia  20. Czech Rep.Globalization Index: The Top 20 /62 1. Austria  10. Ireland  3. Sweden  9. Canada  7.  16. New Zealand  12. Russia  54. Croatia  17. Singapore  2. Norway  15. Australia  14. France  19. Israel  18. Netherlands  6. Slovenia  52. Switzerland  4. US  5.  Index values are based on non-source country responses about various markets (eg: the index ranking for the United States reflects all non-US company responses about the US market)  MH BOUCHET/CERAM-Global Finance .  The survey is designed to gauge the likelihood of investment in specific markets in order to gain insights into likely trends in global FDI flows over the next one to three years.AT KEARNEY: the FDI confidence index The FDI confidence index is constructed using primary data from a proprietary survey administered to senior executives of the world’s 1000 largest corporations. FDI Confidence Index (AT Kearney).5 .5 FDI Confidence Index 0-3 scale MH BOUCHET/CERAM-Global Finance 1 1.5 2 2. Singapore South Korea Thailand Netherlands India Czech Rep Brazil Poland Australia Mexico Canada Spain Italy France Germany UK US China 0 0. World Economic Forum: Global competitiveness ranking Growth prospects of 131 countries: up-to-date and comprehensive data source available on the comparative strengths and weaknesses of leading economies of the world.  MH BOUCHET/CERAM-Global Finance . which combined encapsulate the relative strengths and weaknesses of growth within each economy.  Countries in The Global Competitiveness Report are ranked by the Growth Competitiveness Index (GCI) (GCI Rankings) and the Microeconomic Competitiveness Index (MICI) (MICI Rankings). MH BOUCHET/CERAM-Global Finance .The 9 pillars of global competitiverness Hard + Soft DATA: Public debt + REER + interest rates + inflation + savings rate + legal and Regulatory framework + infrastructure + Education system and management schools…. Global Competitiveness Index 2006-2007 MH BOUCHET/CERAM-Global Finance . Hong Kong SAR Canada Taiwan.United States Switzerland Denmark Sweden Germany 1 2 3 4 5 Cambodia Nicaragua Burkina Faso 110 111 112 113 114 115 116 117 118 119 120 121 122 123 124 125 126 127 128 2008 Ranking Suriname Nepal Mali Cameroon Tajikistan Madagascar Kyrgyz Republic Uganda Paraguay Zambia Ethiopia Lesotho Mauritania Guyana Timor-Leste Mozambique Finland Singapore Japan United Kingdom Netherlands Korea. Rep. China Austria Norway Israel France Australia 6 7 8 9 10 11 12 13 14 15 16 17 18 19 Zimbabwe Burundi 129 130 131 Belgium 20 MH BOUCHET/CERAM-Global Finance Chad .  It analyzes and ranks the ability of nations to provide an environment that sustains competitiveness  Extensive coverage of 55 countries  Over 300 competitiveness criteria are selected. MH BOUCHET/CERAM-Global Finance .IMD World Competitiveness ranking  The World Competitiveness Yearbook : annual study on the competitiveness of nations. profitable and responsible manner. technological. scientific and human resources meet the needs of business.IMD Criteria Over 320 competitiveness criteria (74 criteria) Macro-economic evaluation of the domestic economy. Infrastructure (90 criteria) MH BOUCHET/CERAM-Global Finance . Extent to which basic. Extent to which government policies are conducive to competitiveness. Economic Performance Government Efficiency (84 criteria) Business Efficiency (66 criteria) Extent to which enterprises are performing in an innovative. Inda France = 28  Korea= 29  Russia = 43  Mexico= 47  Brazil= 49  Argentina= 51  Poland= 52  Indonesia= 54  Venezuela = 55  323 criteria within 5 main categories MH BOUCHET/CERAM-Global Finance . Singapore 3. HongKong 4. Switzerland 15. Denmark 6. Japan 26. Germany 20. USA = 1/55 2. Luxemburg 5. Chile 27. China 16. UK 24.IMD Growth competitiveness Index 2007 1. Competitiveness index 2007IMD MH BOUCHET/CERAM-Global Finance . Germany  20. Mexico  55. Spain  33. Chile  27. Hungary  38. Colombia  43. France  29. Korea  30. Japan  26. China  16. Romania  47. Thailand  35. Switzerland  15. UK  24. HK  3. Singapore  3. Russia  44. USA  2. India  28. Venezuela  MH BOUCHET/CERAM-Global Finance .IMD 2007 Competitiveness Index BEST 1. Denmark  5. Luxembourg  4. Economic.PriceWaterhouseCoopers’ Opacity Index The index is based on a major co-operative effort to assess the adverse impact of opacity of capital (the cost of borrowing funds) in a number of countries. A high degree of opacity in any of these areas will raise the cost of doing business and curtail the availability of investment capital. monetary. and tax-related) – Accounting standarts – Business regulations Together. Regulatory).  It is based on 5 components:  – Corruption in government bureaucracy – Laws governing contracts or property rights – Economic (fiscal. MH BOUCHET/CERAM-Global Finance . these create the acronym CLEAR (Corruption. Legal. Accounting. PriceWaterhouseCoopers’ Opacity Index  China (from worst…)  Russia  Indonesia  South Korea  Turkey  Venezuela  Ecuador  India  Kenya Israel  HongKong  Italy  Mexico  UK  USA  Chile  Singapore (to best)  Corruption+ Legal + Economic + Accounting + Regulatory MH BOUCHET/CERAM-Global Finance . Canada 8.Singapore 2. Vietnam 106. India 122. Iceland 10 indicators 11. Chile 83. Russia 120. World Bank: Doing Business in 2008 . Norway 12. New Zealand 3. France (44 in2006) 33. Thailand 31. China 88. UK 7. USA 4. Brazil MH BOUCHET/CERAM-Global Finance 1. Ireland 9. Japan 15. Tunisia 91. Australia 178 countries 10. KongKong 5. Denmark 6. France: Overall business conditions (IFC) MH BOUCHET/CERAM-Global Finance . THAILAND: Overall business conditions (IFC) MH BOUCHET/CERAM-Global Finance . restrictions on banks. distribution. the rule of law. non-tariff barriers to trade. or consumption of goods and services beyond the extent necessary for citizens to protect and maintain liberty itself. labor market regulations. the fiscal burden of government.  The Index includes a broad array of institutional factors determining economic freedom: corruption. black market activities… MH BOUCHET/CERAM-Global Finance .Heritage Foundation: Index of economic freedom  Economic freedom = absence of government coercion or constraint on the production. regulatory burdens. 3. Trade policy. Fiscal burden of government. Capital flows and foreign investment. 4.Criteria of economic freedom  To measure economic freedom and rate each country. 8. 7. Wages and prices. the Index is based on 50 independent economic variables within 10 broad categories of economic freedom: 1. Monetary policy. and 10. Banking and finance. Government intervention in the economy. Black market activity MH BOUCHET/CERAM-Global Finance . 2. 6. Property rights. 5. Regulation. 9. Switzerland 10. Canada 8. Chile 9. Irland 4. Australia 5. UK 13. Netherlands 1.Heritage Foundation: 2008 Economic Freedom Index(10 institutional and economic criteria) HongKong 2. Japan = 17  Korea= 41  Mexique= 44  France = 48  Thaïland = 54  Tunisia= 84  Morocco= 98  Brazil= 101  Algéria= 102  China = 126  Russia= 134  Venezuela = 148  North Korea = 157  France = Over-regulated labor market and overly intrusive state + statist political economy culture + protectionist trading stances + persistent obstacles to foreign takeovers of domestic companies + sluggish growth + persistently high unemployment rate + stubborn budget deficit MH BOUCHET/CERAM-Global Finance . Singapore 3. USA 6. New Zealand 7. quality of regulations and institutional strength…  MH BOUCHET/CERAM-Global Finance .Fraser Institute Since 1975  130 countries  Annual Index of Economic Freedom in the world: reliable measure of cross-country differences in economic freedom. legal structure. using third-party data to help ensure objectivity  Criteria: government quality. access to sound money. personal choice. freedom to exchange with foreigners and to compete in markets. security of property rights. ca/shared/readmore.fraserinstitute.asp?sNav=pb&id=852 MH BOUCHET/CERAM-Global Finance .Fraser Institute’s Index of Economic Freedom Source: http://www. knowledge and a decent standard of living. as measured by real GDP per capita on a purchasing power parity basis. MH BOUCHET/CERAM-Global Finance .Human Development Index  HDI developed by UNDP  A composite index measuring average achievement in three basic dimensions of human development-a long and healthy life. Rwanda 159. Iceland 3. of the 168. Senegal 157. Angola UNDP – HDI 162. Austria 15. Burkina Faso 175. Eritrea 158. Malawi 167. Canada 7.1. Chad 172. Congo. Gambia 156. Nigeria 160. Tanzania. Australia 4. Luxembourg 13. Norway 2. Rep. Benin 164. Ethiopia 171. New Zealand 154. Sweden 6. Dem. Mali 176. Central African Republic 173. France 17. Sierra Leone 177. Japan 8. Guinea-Bissau 174. Rep. United Kingdom 19. Mozambique 169. Netherlands 11. of 163. Ireland 5. Côte d'Ivoire 165. Finland 12. Spain 20. Zambia 166. Guinea 161. Burundi 170. Haiti 155. Belgium 14. Niger MH BOUCHET/CERAM-Global Finance . Switzerland 10. United States 9. Denmark 16. Italy 18. U. 5 79.3 71.5 78.1 79.3 80.6 73.2 77.7 80.1 72.9 77.8 74.6 72.3 74.9 77.6 80.4 72.4 78.0 MH BOUCHET/CERAM-Global Finance 71.3 78.0 72.4 80.4 70.4 74.7 70.Life Expectancy 1970-2005 1970-75 Norway Iceland Australia Ireland Sweden Canada Japan United States Switzerland Netherlands Finland Luxembourg Belgium Austria Denmark France Italy United Kingdom Spain New Zealand 74.3 79.HDI.3 80.4 78.9 2000-05 79.1 79.0 70.7 71.8 78.9 81.2 73.5 73.3 71.0 78.7 .7 71.7 73. Dem.3 37. U. of the Mozambique Burundi Ethiopia Chad 40.0 39.4 39.6 53.8 39.8 46.5 36. Rep.1 41.7 46.4 .6 MH BOUCHET/CERAM-Global Finance 35.0 37.HDI.5 43.5 43. of Benin Côte d'Ivoire Zambia Malawi Congo.6 Central African Republic Guinea-Bissau Burkina Faso Mali Sierra Leone 43. Rep.8 46.4 44.Life Expectancy 1970-2005 1970-75 Senegal Eritrea Rwanda Nigeria Guinea Angola Tanzania.8 50.6 40.6 43.1 43.6 42.8 38.3 53.4 47.0 40.0 49.9 49.0 53.7 44.3 44.6 43.2 41.6 2000-05 55.5 47.6 47.9 43.5 40.1 44.6 43.5 47.8 40. Freedom 40 20 0 Euromoney Corruption Competitiveness Doing Business MH BOUCHET/CERAM-Global Finance .COUNTRIES X & Y: A multi-index composite graph CPI 80 60 Ec. NSE Risk Rating  Rating covers about 100 developing countries  Objective: Market potential assessment for foreign investor  Means: Country risk rating issued once a year  Methodology: 4 parameters computed  Sovereign financial risk  Financial market risk  Political risk  Business environment risk MH BOUCHET/CERAM-Global Finance . Nord Sud Export index  Country risk ratings with 4 factors: – Sovereign financial risks (public debt – sovereign default risk – inconvertible risk) – Market financial risks (systemic and volatilité risks – mastering of the macroeconomic fundamentals – devaluation risks) – Political risks (external conflicts – government stability – social homogeneity) – Business environment (FDI – good governance – labor conditions) MH BOUCHET/CERAM-Global Finance . NSE Rating Methodology  Each rating stems from weighted average of 60 variables  43 qualitatives variables  17 qualitative variables  Each variable is graded from 0 (worst) to 7 (best) MH BOUCHET/CERAM-Global Finance . from 2 quantitatives and 1 quantitative variables   MH BOUCHET/CERAM-Global Finance . computed from 6 quantitative variables Factor 2 (weight 4/10):Sovereign default risk.Exemple NSE Rating Procedure  Parameter 1: Sovereign financial risk  Factor 1 (weight 4/10):Public debt burden in the economy. from 4 quantitative and 2 qualitative variables Factor 3 (weight 2/10):Non convertibility risk. Nord Sud Export: export country risk Risk classes Type of risk rate 7 6 Very low risk (eg: From 541 to 700 OCDE) Low risk From 431 to 540 Moderate risk Rather high risk High risk Very high risk 5 4 3 2 From 381 to 430 From 321 to 380 From 271 to 320 From 161 to 270 1 Dangerous risk From 1 to 160 MH BOUCHET/CERAM-Global Finance . Nord Sud Export: investment country risk Export Sovereign risks (15 criteria) Market risks (15 criteria) Political risks (15 criteria) Business environment (15 criteria) 30% 40% 10% Investments 10% 30% 30% 20% 30% MH BOUCHET/CERAM-Global Finance . Nord Sud Export advice Industrial investors: Export firms: if you master your margins. you should increase them: Risk premium for localisation risk investment to be avoided when >100% 100% 70% 50% 27% 13% 13% 0% Rate s o for a yield rate of 15% From 0 to 215 From 216 to 295 From 296 to 350 From 351 to 405 From 406 to 430 From 430 to 485 From 486 to 540 From 541 to 700 75% 50% 40% 25% 10% 10% 5% 0% >30% 30% 25.50% 19% 17% 17% 15% MH BOUCHET/CERAM-Global Finance .50% 22. Nord Sud Export: investment country risk ratings Hong-Kong: 7  Singapore: 7  Chile: 7  South Korea: 6  Malaysia: 6  Costa-Rica: 6  Mexico: 6  Egypt: 6  Mauritius: 6  Oman: 6  Myanmar: 2  Yemen: 2  Nigeria: 2  Irak:1  Republic of the Congo: 1  Kirghizstan: 1  Tadjikistan:1  MH BOUCHET/CERAM-Global Finance . ch . institutional quality of the strength. Its analysis of the institutional framework addresses issues such as state efficiency.org measures the resulting extra risk premium that stems from additional business and economic costs. and corruption regulatory scope. As such. including corrupt business political stability. s Opacity Index in partnership with the measures the lack of WSJ. MH BOUCHET/CERAM-Global Finance www. bureaucracy as well as bribery and corruption.com/ The Institute for Management Development’s World Competitiveness Report analyses 49 industrialized and emerging economies around the world based on a far-reaching survey since 1989.imd. formal freedom index for some and widely accepted 160 countries. is based on ten socioit focuses on the political and economic relative state of criteria. The ranking environment. public service’s independence from political interference.Heritage Foundation PricewaterhouseCoopers’ established since 1985. framework. the interference. an economic clear. both practices in a industrialized and country’s business developing. accurate. It www. transparency of government policy. state practices. investment transparence of the codes. www. regulatory legal system and the framework.heritage.opacityindex. www. Annual risk reports survey over 1. including institutional efficiency. FH publishes an annual survey of the Progress of Freedom in the world. with emphasis on corruption and business costs. political legitimacy. The ranking is based on a wide survey of regional experts. and government effectiveness. www. The monthly evaluation uses both quantitative and qualitative criteria.freedomhouse.htm The Political and Economic Stability Index of Lehman Brothers and Eurasia measures relative stability in around 20 EMCs by integrating political science theories with financial markets developments.asiarisk. www.legsi.org/rati ngs/index. labor quality. economic performance.com Political and Economic Risk Consultancy (PERC) specializes in strategic business information and analysis in East and Southeast Asia.Freedom House since 1972 monitors the progress and decline of political rights and civil liberties in 192 countries.000 senior expatriates living in to obtain their perceptions of corruption. and human rights specialists. Political stability and civil liberties are ranked on a scale of 1 (best) to 7 (worst).com MH BOUCHET/CERAM-Global Finance . intellectual property rights risks and other systemic shortcomings. consultants. beri. International comprehensive database of Country Risk Guide composite governance measures and tracks indicators.Business Environment Risk Intelligence (BERI) provides a Political Risk Index assessing the social and political environment of a country. subjective assessment of www.prsgroup.worldbank. vernance/ http://www. http://www. Governance quality is included into political risk analysis along with government effectiveness and social indicators. law and accountability. regulatory bureaucracy. and measures stem from the corruption.com Political Risk Service’s WORLD BANK: Given its risk analyses cover a unique policy dialogue with hundred countries and are more than 180 countries. rule of law. expropriation risk. political order. These quality. measuring corruption perception in perceptions of voice and government. stability. government as well as the quality of effectiveness. updated on a quarterly the Bank has developed a basis.com MH BOUCHET/CERAM-Global Finance . It is built on the opinion and scores provided by a hundred experts with a diplomatic or political science background.org/wbi/go experts around the world. http://www.eiu. on a quarterly basis. http://www. The EIU method flows from expert’s answers to a series of 77 predetermined qualitative and quantitative questions. S&P assigns short term and long-term ratings.com MH BOUCHET/CERAM-Global Finance . as well as the quality of governance and the degree of government support in the population.com To look upon governance and corruption. Moody’s relies on the judgment of a group of credit risk professionals to weigh the various risk factors as well as the impact of each of these factors upon business prospects. http://www.com Standard and Poor’s rating approach is both quantitative and qualitative. as well as the economic fundamentals. It is based on a checklist of 10 categories.The London-based Economist Intelligence Unit (EIU) provides a comprehensive é-year forecasting country risk analysis on some 100 EMCs. social and political dynamics. including governance and political risk. Moody’s takes into consideration the structures of social interaction.. The political risk factors gauge the impact of politics on economic conditions.standardandpoor s.moodys. based on a of corruption practices in criteria and qualitative survey of some 100 nearly 90 countries since factors coming from international bankers’ 1995.com MH BOUCHET/CERAM-Global Finance .euromoney. domestic and as much as economic political stability criteria. www. a non-profit countries since 1982 on a twice a year since 1979 non-governmental semi-annual basis.Euromoney publishes Institutional Investor’s Transparency ratings of some 180 ratings are published International. information sources with receives a 25% weighting. Political risk including economic. on a wide network of economists.org www. performance. foreign corporations. The to assess the organization in Berlin.com to 100 (least chance of default). (worst) to 100 ( best). high chance of default) www. financial and sociolocal NGOs. Countries are The resulting score investors. and business graded on scale from 0 scales from zero (very contacts.transparency.institutionalinvesto r. The Corruption surveys with about 40 perception of Perception Index is based political analysts and creditworthiness. methodology is built from creditworthiness of about provides an annual survey a blend of quantitative 150 countries.
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