Summary
During the last 2 or 3 years we have heard talk about country risk, both positive and negative things, which have led more and more people to become interested in the subject, especially in the financial field, from the nervousness that arose from the economic recession and the possible inability of governments to meet their financial obligations; All this allowed the country risk rate to become an indicator of analysis observed not only by experts, but also by everyone through the EMBI (Emerging Markets Bonds Index or Emerging Markets Bonds Indicator) issued by JP Morgan.
Over the years, Mexico has had several variations in terms of the base score according to JP Morgan information, which have been reflected in the country's economy.
Abstract
During the last 2 or 3 years we have heard about country risk, both positive and negative things that have led to more and more people interested in the subject, especially in the financial sector, from nervousness that emerged from economic recession and the possible inability of governments to meet their financial obligations; this allowed the country risk became an analysis indicator observed not only by experts but also by all persons using the EMBI (Emerging Markets Index or Indicator Bonds Emerging Markets Bonds) issued by JP Morgan..
Over the years, Mexico has had several variations in the base score according to the information JP Morgan, which has been reflected in the country's economy.
Country risk is an issue that should matter to all people, whether it is part of the financial field or not, since the different variations that exist in terms of its measurement directly affect the country's economy, because when country risk increases there is a greater perception of risk about the economy as a whole; This can be reflected in the increase in the interest rate, causing mortgage loans, loans to buy a car, business loans, among others, become more expensive, or in the worst case, the devaluation of the currency as a cause of the increase in the risk country.
To understand the importance of country risk and how it has interfered in the economy of our country over the years, it is necessary to understand the concept of country risk, some authors define it as follows:
"Risk assumed by financial entities, companies or the State, due to the possible non-payment for commercial operations or loans that they carry out with the public or private sector of another country" (Castro, 2009)
"Country risk is an index that tries to measure the degree of risk that a country entails for foreign investments" (Anzil, 2001)
“It refers to the probability that a country, issuing debt, will be unable to meet its debt payment commitments, in principal and interest, in the agreed terms. In this sense, three sources can be mentioned from which the risk of breach of an obligation comes: Sovereign Risk, Transfer Risk and Generic Risk. " (Montilla, 2007)
From all the definitions it can be concluded that country risk is a measure of the probability that a country will default on the financial obligations corresponding to its external debt.
The risk of non-compliance with obligations has three levels of generation:
- Sovereign Risk. It is owned by creditors of state securities. 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.
Mexico is one of the countries with the best Country Risk scores within emerging nations in Latin America over the last 10 years; as can be seen in the following graph, where it is compared with Argentina, Brazil and Colombia.
JP Morgan - Mexico
In 2004, Mexico improved its international assessment of "country risk" due to its economic policy, economic structure and liquidity, according to analyst Robert Wood of The Economist Intelligence Unit (Unidad de Inteligencia Económica).
"Mexico improved due to the accumulation of international reserves, the growth of exports and the upward revision of economic growth in 2004 from 3.5 to 4 percent," Wood said in an interview.
As of the second half of 2007, country risk increased in general, but for the first time Mexico obtained the lowest in Latin America, below Chile. In 2008, the rise started by the mortgage crisis in the United States was exacerbated by the financial crisis and the crash of the stock markets around the world.
In 2009, Mexico's country risk began on January 2 at 376 basis points, four basis points above the level reported in December 2008, thus starting the year with its first rise after having had three consecutive weeks downward.
In 2010, Mexico's country risk stood at 142 basis points in December, 14 units below the previous level, which partly reversed the sharp rise it had suffered in recent weeks.
For their part, the country risk of Argentina and Brazil fell by 43 and 20 basis points during the referred period, reaching 490 and 179 units, according to data released by the Ministry of Finance and Public Credit (SHCP).
On the other hand, the country risk in December 2011 stood at 188 basis points, 44 basis points higher than the level reported at the end of 2010.
While since the beginning of 2012, it remained in a consistent reduction that accumulated a decrease of 50 basis points compared to the level at which it closed in the previous year, according to information from JP Morgan.
And despite the uncertainty that the markets experienced in June 2013, Mexico's risk premium (EMBI from JP Morgan) remained at 196 basis points, which is the lowest level among the main emerging economies in Latin America, even at extend the comparison with Russia, Indonesia, Turkey and South Africa.
Currently it has had variations but it is down, the following table shows the variations it has had in the last days that have elapsed this year.
Country Risk Table 2014.
Country Risk Table 2014.
Country Risk Graph 2014.
Country Risk Graph 2014.
It is worth mentioning that the historical minimum level of Mexico's country risk is 71 points, seen on June 1, 2007, and its maximum level is 624 basis points, reached on October 24, 2008.
Conclusions
The country risk will serve as a "Meter" that will allow us to know the perception that investors have of the country and as an index that will help and allow efficient investment decisions.
That is why it is important to maintain a level of Country Risk that does not affect the nation's economy.
Country Risk within emerging markets, as mentioned above, is highly related to investment decisions, which generally rest on qualitative and consensual analysts' assessments. These are based on expectations that try to anticipate the realization of facts and on factors related to the: credibility of economic policies and their makers; reliable and timely economic information; country credit experience; competitive emulation; incentive structure for portfolio managers; and, the perception of the political stability of the country, among other aspects.
Mexico has gone through high and low levels in terms of country risk, which have had an impact on the Mexican economy, but still it has remained among the countries with the best scores in Latin America.
Bibliography
- Anzil, F. (August 12, 2001). Econlink.com. Retrieved September 20, 2014, from Econlink.com: http://www.econlink.com.ar/definicion/riesgopais.shtmlCastro, AM (April 15, 2009). UNAM Library. Retrieved on September 20, 2014, from the UNAM Library: http://fcasua.contad.unam.mx/2006/1237/docs/1.pdf Montilla, F. (October 2007). Economic zone. Retrieved on September 20, 2014, from Economic Zone:
