1

Multinational Financial
Management
Alan Shapiro
7
th
Edition
J.Wiley & Sons

Power Points by
Joseph F. Greco, Ph.D.
California State University, Fullerton
2
COUNTRY RISK
ANALYSIS
CHAPTER 6
3
PART I. THE MEASUREMENT OF
POLITICAL RISK
I. MEASURING POLITICAL RISK
A. Country-specific perspective

4
THE MEASUREMENT OF POLITICAL RISK
B. Political Stability
1. Measured by:
a. Frequency of government
changes
b. Level of violence
c. Number of armed
insurrections
d. Conflict with other states
5
THE MEASUREMENT OF POLITICAL RISK
C. Economic Factors
1. Indicators of political
unrest
a. Rampant inflation
b. Balance of payment
deficits
c. Slowed growth of per
capita GDP
6
THE MEASUREMENT OF POLITICAL RISK
D. Subjective Factors
1. Profit Opportunity
Recommendation
2. Political Risk and Uncertain
Property Rights
7
THE MEASUREMENT OF POLITICAL RISK
3. Capital Flight
a. Definition:
the export of savings by a
nations citizens because of
safety-of-capital fears.
b. Measurement: use the
balance-of- payment account
8
THE MEASUREMENT OF POLITICAL RISK
c. Causes of capital flight
1.) Inappropriate economic
policies
2.) Expectation of devaluation
3.) High political risk
9
PART II. ECONOMIC AND
POLITICAL FACTORS
II. Economic and Political Factors
Primary focus: How well is the country
doing economically?
A. Fiscal Irresponsibility
-high government deficits
B. Monetary Instability
C. Controlled Exchange Rate System
-currency usually overvalued
D. Wasteful Government Spending
-inability to service foreign debt
10
ECONOMIC AND POLITICAL
FACTORS
D. Resource Base
-lack of strong work ethic
E. Country Risk and Adjustment to
External Shocks
1. What are the impacts of
external shocks:
-how well a nation responds
varies

11
ECONOMIC AND POLITICAL
FACTORS
2. Key Indicators of Country Risk
a. Relative size of government
debt
b. Money expansion
c. Existence of government-
imposed barriers to market
forces

12
ECONOMIC AND POLITICAL
FACTORS
2. Key Indicators of Country Risk
(cont)
d. Level of tax rates
e. Amount of government-owned
firms
f. Political and fiscal responsibility
g. Amount and extent of
corruption
13
ECONOMIC AND POLITICAL
FACTORS
Key indicators of economic health
a. Structural incentives
b. Legal structure
c. Clear incentives to save
d. Open economy
e. Stable macroeconomic
policies
14
PART III. COUNTRY RISK ANALYSIS
IN INTERNATIONAL BANKING
I. Country Risk and the Terms of Trade
What ultimately determines a
nations ability to repay foreign
loans?
- the speed of adjustment

15
COUNTRY RISK ANALYSIS IN
INTERNATIONAL BANKING
II. The Governments Cost/Benefit
Calculus
- debt to wealth ratio
- cost of default
- fluctuations in the terms of
trade
16
COUNTRY RISK ANALYSIS IN
INTERNATIONAL BANKING
III. Lessons from the International Debt
Crisis of 1982
Economic reforms that work:
Strong head of state
Viable economic plan
Competent economic team
Support at the top
Sell the program to all levels of society