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Abstract
The paper examines the effect of various economic and political factors on country risk ratings published by Euromoney and Institutional Investor. As global competition drives corporations, managers frequently rely on country risk analysis as a crucial aspect of strategic decision-making. The purpose of this paper is to investigate the extent to which country risk measures can help in predicting country ratings. We examine seven widely used measures of country risk across sixty-one countries. Results from the empirical analysis indicate that country risk ratings can be replicated to a significant degree with a few available political and economic indicators. Political risk was found to exert a significant influence on country ratings. The results also confirmed that both Euromoney and Institutional ratings predicted similar outcomes.
Keywords:Country Risk Analysis, Gross National Product, Gross Capital Formation
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I. Introduction
Recent years have witnessed an unprecedented interest and research in identifying the determinants of country risk analysis. Institutions engaged in managing global investment strategies are exposed to country risk - the risk that economic, social and political events in a foreign country would adversely affect an institution's financial interest. Managers frequently rely on country risk analysis while formulating their strategies. Moreover, empirical researchers have agreed that country risk is the result of political, social and economic factors (Oetzel, et. al. 2001). Practitioners of country risk analysis face a daunting task in their selection of variables and evaluation systems to represent and interpret the various economic and social-political factors (Burton and Inou, 1985).
Research on the extent to which country risk measures predict country risk ratings flourished in the 1990s. These ratings are an important component of country risk management because they provide a framework for establishing country exposure limits that reflect the institution's tolerance for risk. Various empirical studies (for example, Feder and Uy 1985; Brewer and Rivoli, 1990) have developed quantitative models to replicate the country risk ratings published by banking magazines such as Euromoney and Institutional Investor. These ratings, which are considered to provide a measure of the credit worthiness of sovereign borrowers, affect the cost of capital flows to sovereign borrowers because they seem to have been systematically linked to credit pricing in the Euro market (Feder & Ross, 1982).
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