Country Risks and FDI
Impact of terrorism in Foreign Direct Investment
Country risks management
(UNCTAD)
Said that between 2000-2004, the countries that were in under developing, went up about 28% and the developed countries plunges around 27%.
Political role
Terrorism is a factor that a lot of FDI take into consideration before investing on the country, but studies that have been made through the years said controversial things.
The studies from PSU showed that this terrorism attacks happen more often in countries with democratic forms than authoritarians.
Harvard Study
The higher the level of terrorism risk = lower levels of net FDI.
Capital Markets
A study shows that the recovery of the countries that suffered from terrorism attacks from 1990 to the present are recovering in a faster way than before 1990.
in 1940 when Germany invade France, the US Market dropped 21% and took 795 days to recover. After the 9/11, the Market dropped 8% and took only 40 days to recover.
Pakistan
Greece and Spain attacks
The acts of terrorism had a negative impact and discouraged the FDI by 13.5% annually in Spain and 11.9% in Greece.
Smaller countries face a persistent threat of terrorism are heavily impacted by the reduced of investment and economic growth
Global Recovery since 2009
Says that the developed countries where the ones that were more affected with les FDI than the developing countries from 2008 through 2009.
"New Normal"
Everything change after the global economy stabilized, making the cross-border transaction an high risk with a low margin for errors.
Economic Nationalism
In 2010, Pakistan threatened to cancel a $3 billion Reko Diq copper and gold project that was leaded by Canadian investor Barrick Gold. The project was expected to earn $40-$50 billion from the extraction of raw copper and gold.
The extractive industries are generally more vulnerable to adverse action on the part of host governments.
- They tend to be large and high profile - They are strategically important to host countries - They are subject yo a wide range of legal and laws, that frequently change.
A big error that Pakistan made was focusing too much on the Net income than on what makes sense from all parties' perspective.
Bolivia
Mass Nationalizations
In 2006, Evo Morales decides to size all the assets of foreign-owned oil and gas operations and also to nationalize large, privately held property holdings.
A lot of brazilians farmers have invested more than $1 billion to purchase land in an eastern region of Bolivia called "Santa Cruz",, which is one of the most fertile lands in Bolivia. This farmers grow more than a third of Bolivia's soybeans, which is equal to the 7% of the National economy.
Bolivia has, since the nineteenth century, Fought for land and what lies under it with its neighbors. Approximate Half of the land once owned by Bolivia that at one time stretched to the Pacific Coastline, you're gone:
A Chilean assault on the Litoral Province of Bolivia in 1884 cost Bolivia Its shoreline (the war was finally battled over the right to export Dry bird dung, prized for producing fertilizer and saltpeter at the time).
"While nationalization is a "fix" for national economic ambitions in the short term, Its longer-term implications are typically negative because foreign companies Investment in countries that have a willingness to nationalize foreign-owned properties that would be reluctant.
What was done by Brazil, Chile, and Uruguay was what Morales was unable to do this, having succeeded in combining fiscal prudence. With free trade and investment strategies and with the protection of their options to respect for international traders and investors, while at the same time addressing wider national markets Socio-social needs.
Papua New Guinea
Natural resource curse
In 2009, a consortium led by ExxonMobil approved a massive and logistically challenging liquefied natural gas. Thats why there was a $15 billion initial phase investment and was set to produce around $35 billion in revenue.
The possible revenue is amazing but it is also a huge test for the country. The government will likely realize a total %5.6-$7.5 billion revenue stream from any existing revenue source.
Lessons Unlearned
The government has continued to boost its efficiency in the last decade. Investing much of its 2005-2005 windfall income at the national level with the support and encouragement of multilateral development banks, the 2008 commodity price boom in trust funds, However, that did not prevent the government from raiding the windfall funds for social and infrastructure spending in 2009 and 2010.
Risk Country
Country v. Sovereign v. Political v. Transactional risk.
Country risk broadly refers to the likelihood that a sovereign state may be unable or unwilling to fulfill its obligations toward one or more lenders. It involves an assessment of economic performance in the context of a country’s demand for external financing and judgments about the prospect for changes in financial returns.
Sovereign risk is the risk that a foreign central bank will alter its foreign-exchange regulations, thereby significantly reducing or completely nullifying the value of foreign-exchange contracts. It also refers to the risk of government default on a loan made to it or guaranteed by it
Political risk concerns those political and social developments that can have an impact upon the value or repatriation of foreign investment or on the repayment of cross-border lending, which may originate within a host country, the home country, or the international arena. This includes arbitrary or discriminatory actions taken by governments, political groups, or individuals that have an adverse impact on trade or investment transactions.
Asia Crisis
The Asia Crisis has provided banks with some valuable lessons on transactional risk management, including the need to more efficiently integrate a range of additional sources of knowledge into risk analysis, including the credit risk associated with private sector counter parties, the possible loss of liquidity and the impact of contagion.
Elements of a Effective risk management process
Adequate risk management policies and procedures as well as an accurate process for analyzing country risks.
Established country exposure limits and a regular monitoring of country conditions
Adequate internal controls and a audit function
The boardroom Vacuum
At a board meeting of a top 20 multinational corporation, the question of whether to invest $50 million in a project in a Middle Eastern country was discussed. As it turns out, the country in question was not as stable as it was portrayed and the company’s investment became tied up in costly legal limbo, which had far-reaching and potentially damaging implications for the company’s brand and reputation.
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