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Lecture 3

GMS 400 Lecture 3: GMS400 - Lecture 3
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Department
Global Management Studies
Course
GMS 400
Professor
Dale Carl
Semester
Winter

Description
GMS400 Lecture 3 Country Risk Analysis Performing Due Diligence on a Country Before Entering the Market The purpose of country risk analysis is to determine the risk of entering a countrys market Basically, you are conducting due diligence on a country before you enter it, similar to conducting due diligence on a company before buying it There are three levels of country risk analysis Political Risk Analysis: Is the country stable politically? Economic Risk Analysis: Can we make a profit and repatriate the funds? Operational Risk Analysis: Is there any danger to our employees or our property? Why Banks Perform Country Risk Analysis They lend to companies for projects and investments all over the world; therefore: They need to establish the risk premium for each country (basic commercial rate plus a percentage for the specific country risk) They need to determine their maximum exposure (lending limit) for each country They lend up to their credit limit in a country for various projects They have other projects for which companies need financing which have to wait until there is room in the countrys credit limit from the bank When loans are repaid, the bank can then finance other projects, up to their country limit Political Risk Analysis PURPOSE: to identify, in advance, existing and potential risk situations, primarily political in nature or origin, in order to reduce the risk of financial loss to your firm Ultimately, you are looking for a level of political stability that is acceptable to your firms management, shareholders, and financiers Must review a lot of data and talk with people who are familiar with the country Can also check websites that perform country risk analysis Examples of Political Risk Occurrence War Coup dtat revolution Election of nationalist govt. Repression (treating citizens badly) e.g. Apartheid Strikes Potential Effects Economy stops; damage to assets May not honour agreements by previous governments Nationalization of industries Embargo sanctions Ruin investment climate
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