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Country risk refers to uncertainties related to cross-border transactions. Different types of risks should be analyzed using structures relevant to the type of transaction. A system designed to flag potential risks for a long-term foreign direct investment reveals a mixed situation in Latin America. Brazil and Venezuela present relatively high economic policy risks that may reduce anticipated long-run growth. Brazil's exchange risk fell sharply after it floated the real. Argentina's exchange risk, on the other hand, increased sharply in the past twelve months. Mexico's policy and exchange risks fall in a middle range.
Management teams usually have wellestablished methods to assess the riskiness of a business transaction or project in their home country. Move the project into another country, however, and another dimension of uncertainty overlays the analysis. This additional dimension, typically called country risk, encompasses the uncertainty of achieving expected financial results solely due to factors relating to the project's location in another country. Currency fluctuations, profit repatriation issues, macroeconomic performance, political or legal issues are just some of the factors that may create risk in cross-border transactions.
Country risk analysts need a comprehensive knowledge of international and macro economics as well as an understanding of the history and sociopolitical institutions in the target country to make a complete risk assessment. And while project risk usually lies outside the purview of country risk, analysts also need to know which country factors produce the greatest uncertainty for their company's proposed activities in a target country. For example, a short-term financial transaction or one-time equipment export to Brazil faces a much different country risk factor than does the construction of a plant in Brazil designed to produce a product for the MERCOSUR market for the next twenty years.
Country risk assessment often attempts to identify the impact of sociopolitical changes or relatively infrequent economic shocks that cannot be predicted from statistical analysis of country data. A full risk study therefore theoretically requires qualitative as well as quantitative assessment. The translation of theory to practice, however, suffers from a number of issues in a quantitatively oriented world. To meet the quantitative demand, many risk systems convert qualitative factors into numbers based on vague or nonexistent theoretical underpinnings, then combine these numbers into a single ad hoc...