Country Risk

Outline of the model
At the heart of country risk is the Economist Intelligence Unit's Country Risk model which measures country specific risk associated with the political, economic policy, economic structure, and liquidity situation faced by 100 emerging markets. Risk scores can be used for making a general assessment of the risk of a crisis in the country's financial markets, where foreign investors may have exposure. It is also useful for investors wishing to get a snapshot of the generalised risk of investing in a particular country.

Calculating the ratings
The model operates by asking our country expert to answer a series of quantitative and qualitative questions on recent and expected trends relating to the general categories of political risk, economic policy risk, economic structure risk and liquidity risk in the relevant country. Individual question responses are graded providing individual country risk assessments on individual indicators, the general categories and the country's overall credit risk. Scores are produced in single point increments from "0" to "100" or letter bands from "A" to "E", representing a movement from lower to higher risk.

Country Risk Ratings definition
Country risk model ratings are compiled in such a way that general country risk scenarios can be formulated which may help users of EIU Market Indicators & Forecasts interpret of our risk scores. The single point system ordered from "0" to "100" and corresponding letter band system ordered A to E, moves from less to higher risk.

Band A (0-20 points)
Countries which have no foreign-exchange constraints on their debt-service ability and no problems financing their trade activities. Their economic policies are deemed to be effective and correct in relation to the conditions they face (whether in a boom or a recession) and they have a working government (not always a multiparty democracy in the European mould) capable of effective policy implementation. These countries have no significant constraints on any international financial transactions.

Band B (21-40 points)
Countries which also have no significant foreign-exchange constraint, but whose economic policies or political structure may be a cause for concern. B-rated countries have access to commercial capital markets. There are no major risks with respect to international financial transactions, but political risk and economic policy risk often need to be watched carefully.

Band C (41-60 points)
Countries which have a record of periodic foreign-exchange crises and political problems. Many of these countries will have negotiated external debt-rescheduling agreements and could be in the process of successfully carrying out an economic reform programme. These economies will usually be in a state of flux with persistent, but controllable, internal and external imbalances. However, some will have access to commercial capital markets. With caution, this set of countries will often offer exciting opportunities for foreign investors.

Band D (61-80 points)
Countries which are currently suffering from serious economic and political problems. Arrears, debt rescheduling and restricted access to official lending are common characteristics. Many have a narrow, commodity-dependent export base, resulting in potentially large and frequent fluctuations in export earnings and lengthening remittance delays. Many of these economies will be heavily regulated in the initial phases of restructuring or will have failed to implement such reforms. Any investment or other international financial transactions should be very carefully considered and would best be postponed.

Band E (81-100 points)
Countries which are likely to have a high and rising level of arrears. They will be characterised by severe fiscal imbalances and hyperinflation. Foreign exchange will be scarce, and their relations with multilateral lenders severely strained. Often they are in or on the verge of civil war or undergoing violent political change. Political risk is usually extremely high.

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