To help professionals and students getting started with country risk analysis, I developed a Framework of Country Risk Drivers.
It gives a valuable overview of political, geopolitical and macro-economic risk drivers.
You can use this framework as a hands-on tool that facilitates a well-structured process for doing country risk analysis.
I use this Framework of Country Risk Drivers to teach both the participants in my professional training courses and the students in my university courses. However, it could also be a valuable starting point for the analysis of countries in other settings.
It is important to realise that there is not one perfect framework that is endorsed by all experts. My selection of the categories and the division of country risk drivers across them is based on my understanding of country risk. Other experts in the field may have a different way of organising the many country risk drivers. After all, the framework reflects only a small number of possible indicators that could be used in country risk analysis.
Moreover, the selection of country risk drivers should always depend on how we define country risk. In fact, country risk is notoriously hard to define. Depending on the professional background of who you ask, you could get widely varying answers. In addition, there are various forms of country risk. Do we for example mean:
- the risk of non-payment by the government of that country (sovereign risk)?
- a strong and broad deterioration of the creditworthiness of all debtors in the country (collective debtor risk)?
- the absence of ways to change local currency in foreign currency (convertibility risk)
- the restrictions in that country on the payment of foreign-currency denominated obligations to creditors abroad (transfer risk)?
In addition, companies with cross-border operations care about many other risks such as investment risk, currency risk and operational risk.
The framework with country risk indicators is not adequate to deal with all countries under all circumstances. It should always be re-considered and re-designed in line with the context and objectives of the analysis.