Introduction

Framework of Country Risk ConceptsThis post discusses some concepts that are important during any country risk analysis. It also offers you a pdf file with a Framework of Country Risk Concepts.

It is based on my experience as both a country risk analyst and as a trainer/lecturer. You can download the overview for free and use it as the basis for a more context-specific country risk analysis framework. Please note than an effective framework always requires adaptation and specification of the general suggestions in this post and the accompanying overview.

If you start with country risk analysis, your first challenge is to become familiar with the most important country risk concepts. Starting with country risk itself, it may at first seem confusing to discover that this concept is very hard to pin down. This makes however perfect sense and its definition should always be selected in line with the underlying analytical objectives.

A related question is which country risk types are most important in a specific context. Banks for example are concerned about sovereign risk, collective debtor risk, convertibility risk and transfer risk.  To get more familiar with these country risk types, please check my Framework of Country Risk Concepts. This framework offers you a possible definition for each country risk type (and several other country risk concepts that are introduced below).

An effective country risk framework further requires the inclusion of various other concepts. The first two, and most straighforward ones, are creditor and debtor. These are of course essential concepts in banking and finance as a whole. On top of this, the locations where creditor and debtor reside are essential in country risk analysis.

Two other major concepts are counterparty risk and environment risk. They refer to the scope of country risk. In other words, the central issue is here how many debtors may face payment difficulties.

To describe possible payment difficulties, you can use the concepts arrrear and default. The second one points to a more severe situation.

The concepts payment ability and payment willingness are important in both the assessment of country risk and the interpretation of arrears or default. Both also require a good understanding of the status of particular currencies in two ways. First, what is the currency in which the debt is denominated? Second, hat is the currency in which the debtor generates her/his earnings? If they are different, it could have a profound impact on country risk. If the debt is denominated in a hard (foreign) currency, while the earnings of the debtor are in a soft (local) currency, country risk is more extensive and complex.

As I note above, my Framework of Country Risk Concepts suggests definitions for each concept. These definitions seek to encourage you to reflect on the role that country risk plays in your research or business. They further should be seen as starting points for the development of an applied and comprehensive country risk analysis framework.

Please feel free to change the definitions and add/remove concepts in line with the requirements of your research or business. The overview may also assist you with identifying the skills that you or your organisation need in order to develop such a framework. If you have any questions about concepts, definitions or skills, please contact me.

These country risk concepts and their definitions are not adequate to deal with all activities in all countries under all circumstances. They should always be re-defined and re-conceptualized in line with either your analytical objectives or the operational context of your business.

Framework of Country Risk Concepts

My Framework of Country Risk Concepts

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