Summary
In the midst of globalization, the countries of the world have been the headquarters of creations of important companies, with a great variety of markets. In today's world, new ways and ways of doing business arise, taking into account sufficient information for decision-making under requirements of facts and economic indices with financial, economic and accounting information standards for countries.
Thus, over the years, a term appears used by economists, investors, businessmen, executives and governments to fulfill their obligations called "Country Risk"; a macroeconomic indicator that allows us to see how Mexico has had variations.
Abstract
Amid Globalization World countries, have hosted works of important companies with a wide variety of markets. In today's new forms and ways of doing business, given sufficient information for decision making under requirements of facts and economic indices with standards of financial, economic and accounting information for emerging countries.
Thus, through the passage of time a term used by economists, investors, entrepreneurs, executives and governments to meet their obligations called "Country Risk" arises; a macroeconomic indicator that allows us to see how Mexico has had variations.
Introduction
The purpose of this essay is to know what Country Risk means and to find out what other authors said about the subject, what Country Risk consists of, analyzing the factors that can modify it such as: Inflation, Liquidity, Devaluations, Maturity of external debt, Risk of default, Political Stability, Macroeconomic and fiscal stability and Bank Strength with the help of a formula estimated by J. Morgan's EMBI + Indicator.
(Interest rate of the analysis country bond - Interest rate of the United States bond) x 100
Being one of the main financial indicators is country risk, which calculates the appreciation of foreign investors regarding the national finances of a country.
The emerging markets and the controversy that exists with the Mexican economy since, although the country's risk level is not very high, it has been the seat of recognized investors taking or considering its indicators in order to be alert to what is happening. Since for the foreign investor the country risk analysis is crucial; if the level of risk is high, there will be no interest in making investments, but if the risk is low, the country is more attractive for future business.
Background
The concept of country risk was born in the 20th century as a result of an initiative by a private company associated with the issuance of reports on a railway company in the United States that were Bond issuers. Thus, after several years, country risk has evolved taking into account the characteristics that this entails and considering that this issue is of utmost importance for finance.
The country risk issue is part of the financial field that well affects our economy, not directly reflected, but if there are ways to cover them and include them in other things, such is the case of mortgages, credits and the devaluation of our Mexican currency.
Some authors have commented on country risk:
- It can be understood that country risk is the average risk associated with investments made in a specific country (EFXTO community forex, 2009) The concept of country risk refers to the probability that a country, issuer of debt, is incapable respond to its debt payment commitments, in capital and interest, in the agreed terms (Economic Zone, 2007). Country risk is an index that tries to measure the degree of risk that a country entails for foreign investments Anzil, 2001.
Thus, according to the previous definitions, it can be concluded that country risk is an indicator of an emerging country to pay its debt, whether it is capital or its interest due. Therefore, this breach involves 3 types of risk, which are:
Sovereign Risk: Owners of state title creditors
Transfer Risk: Inability to pay principal, interest, and dividends
Generic Risk: Success or failure of the business sector due to political, social and economic instability
According to defaults, it can be said that the higher the country risk, the higher the payment risk and the higher the payment risk, the greater the interest generated on the debt. Since an analysis of a country's ability to pay is based on economic and political factors as a result of a repayment. The Country Risk premium is the fundamental determinant of gross domestic fixed investment in our country.
Factors that Modify Country Risk
- Inflation Liquidity Devaluations External debt maturity Risk of default Political stability Macroeconomic and fiscal stability Banking Strength
Angeloni and Short (1980) and Feder and Ross (1982), have investigated the relationship in the primary market between interest rate differentials for bank loans and Country Risk.
Currently, country risk is measured through the EMBI (Emerging Markets Bond Index), created by JP Morgan Chase, that evaluates a basket of dollar debt instruments issued by emerging countries, on a daily basis.
The EMBI, the main indicator of country risk, is the interest rate difference paid by dollar-denominated bonds, issued by underdeveloped countries, and United States Treasury Bonds, which are considered "risk-free". This differential (also called spread or swap) is expressed in basis points (bp).
In other words, the country risk can be calculated using the following formula:
(Interest rate of the analysis country bond - Interest rate of the United States bond) x 100
Country Risk is measured in basis points (every 100 points equals 1%), so when you hear that the Country Risk index stands at 1,200 points, it is actually being said that the issuing country's bond pays an additional 12% on the rate of American bonds.
It is worth remembering that the historical minimum level of the country risk of Mexico is 71 points, on June 1, 2007, its maximum level is 624 basis points, on October 24, 2008, and in July 2014 it was 140 points
Mexico is measured through the JP Morgan Emerging Market Bonds Index (EMBI +) which is made up of 109 instruments from 19 different countries and differs from the EMBI in that it does not only contain Brady Bonds or bonds with characteristics similar to these. The countries that make up the EMBI + index are Argentina, Brazil, Bulgaria, Colombia, Ecuador, Egypt, Malaysia, Mexico, Morocco, Nigeria, Panama, Peru, the Philippines, Poland, Russia, South Africa, Turkey, Ukraine and Venezuela. Thus, the EMBI + offers a broader picture of the type of instruments in emerging countries.
Globalization and country risk in Mexico
According to the following, some investors continue to see good fundamentals in Mexico according to other emerging countries with a current account deficit of 1.8% of GDP in June compared to Brazil and 6% of GDP in Turkey and India. Mexico has improved in international reserves to external debt, but the ideal would be for Mexico's risk to be consistently below the historical minimum and thus with a lower country risk, a government of less speculation would be obtained and its resources would be assured, such is the case of our oil.
There are Risk Rating Agencies known worldwide as:
- Moody'sStandard & Poor'sFitch
Emerging markets are the so-called developing economies, economies with a high growth potential. Standard & Poor´s defines the term emerging markets as a stock market that is in transition, increasing in size, activity and level of sophistication.
Market Structure:
- Capital Market: The market has size and liquidity. Foreign Exchange Market: Facilities developed for trading in the markets
FOREX and enough reserves available for trading.
- Futures Market: The market has size and liquidity. Options Market: The market has size and liquidity. Custody Market: Low costs for custody.
Conclusions
The determination of Country Risk is a complex process that encompasses the study of qualitative factors, the development of mathematical models and the evaluation of the investment decision-making process.
The perception of Country Risk and the way it is expressed, has evolved according to the development of international financial markets, becoming more complex, to the extent that market participants, trading methods and instruments have expanded and diversified.
In a globalized world, where financial markets adjust instantaneously, a fall in the economy is very likely, but the country risk tries to explain why countries that are geographically distant from each other and have no commercial relationship may be affected by the crisis. from one of your group members.
This fact has helped market participants differentiate Mexico from other Latin American countries, raising the confidence and understanding of this community about Mexican economic policies, reducing uncertainty and, with it, part of the risks.
Bibliography
- EFXTO forex community. (2009). Retrieved on September 30, 2014. ECONOMIC ZONE. (OCTOBER 2007). Retrieved on SEPTEMBER 30, 2014, from Zona Económica.Anzil, F. (August 12, 2001). Econlink.com. Retrieved on September 20, 2014, from Econlink.com: http://www.econlink.com.ar/definicion/riesgopais.shtmlEl Financiero (2013) accessed on September 30, 2014.Standard & Poor's Emerging Markets Database (2007): "Methodology, definitions, practices".
