Country risk

Corporate risk resulting from unstable political, economic and social circumstances in another country
  • Political risks are a consequence of an internal political situation in a given country, or of that country's foreign policy. Internal risks result from ideological clashes among the political parties in a country, social tensions, and incompetent or passive government. Risks relating to foreign policy stem from a country's membership in political alliances and/or from the hostile behavior of other countries toward the country in question. For the investor, such political risks are manifested as discrimination against foreign capital (to varying degrees) and, in the extreme case, in the danger of expropriation (with or without compensation).
  • Economic risks are primarily macroeconomic and cannot be considered separate from political risks. In particular, they result from the structure of the economy in question, and how it is tied into the global economy. The financial repercussions of economic risks are manifested above all in exchange rate risks (also known as currency risk) and transfer risks that can impede or completely break down international payment transactions and movements of capital. The latter are counteracted by means of currency management, by monitoring the movement of capital, and, in extreme cases, by "freezing" the accounts of foreign business partners.
  • Country risks are assessed on a regular basis by so-called country indices using scoring models. The best-known index is the Business Environment Risk Index (BERI), which assesses the country risk of around 50 countries on the basis of quality criteria (determined through surveys of experts) and quantitative economic data.
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