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Country Risk Management Ch 2 & 3, investment-1450343-1225713 - Coggle…
Country Risk Management Ch 2 & 3
Economic Nationalism in Pakistan
Jan 2010, Pakistani government threatens to cancel mining projects in order to "protect its strategic national interests"
investors should consider all parties' perspective and goals
companies only consider well being and not the local long term well being
how risk could have been reduced:
offering obvious benefits to the country to prevent the government from pulling back
inclusive planning, construction and operation
strong relationships with tribal leaders
agreements with sense of fair play for all
Extractive industries are more vulnerable because:
tend to be big and high-profile
employ thousands
huge economic impact on local community
subject to hanging laws and regulations
production of waste products= scrutiny due to environmental compliance
natural resources can be nationalized
Bolivia's Mass Nationalizations
2006: President Evo Morales decided to seize assets of foreign oil and gas operations
nationalization with no compensation (illegal under international law)
historical context: Bolivia's long history of losing land to its neighbors
this was a popular decision among bolivians due to wish to have control over own resources
nationalization: makes investors hesitate
"democratic election is no guarantee of friendly foreign investment policies"
Papua New Guinea's Natural Resource Curse
PNG economy heavily reliant on natural resources
long history of governmental interference with FDI
past mismanagements and overspending by government= risk for investors
mining project largely unpopular by population
perception of unequal distribution
no regard for environmental protections nor locals
locals reacted violently and it ended in an 8 year old civil war
companies now construct schools, roads, hospitals or support local sustainable businesses
companies offer the local economic benefits the government failed to offer in order to gain the populations approval
government created an environment of failure to investors due to failure ti deliver economic benefits ti its people
systematic corruption= unsound governance = risk
Defining Country Risk
political risk: firm-specific vs country
firm-specific political risk
directly affect the company
reduced through strong arbitrary language during negotiation or increased on site security
country political risk
can only be avoided by stoping operations in that country
political risk: government vs. instability
government political risk
arises from actions of government authorities (legal or not)
instability political risk
arises from political power struggles (like internal government conflict or mass riots due to social problems)
country risk: likelihood sovereign state is unable/unwilling to fulfill obligations towards its lenders
analyzes: economic and financial performance/factors
sovereign risk: central bank altering foreign exchange regulations which affect foreign exchange contracts
politcal risk: political or social developments with effects on trade or investment
transactional risk: the country, sovereign, political, economic, financial, technical, environment, developmental and sociocultural risk which is assumed in every international transaction engaged in
banks & transactional risk
necessary measures:
establish clear tolerance limits
establish clear lines of responsability and accountability for actions
primary knowledge aquisition
regular visits to country for in-house assessment
risk asessment must be transparent and independent
use of variety of sources
identify recurring themes and topics
proper planning and due dilligence
realize that media information is often misleading
Risk = probability x consequences
risk analyses should be: consistent, concise, informative and decisive
actual rating is subjective
Wagner, Daniel. Managing Country Risk: A Practitioner’s Guide to Effective Cross-Border Risk Analysis. Taylor and Francis.
