The Country Risk in financial investments and in the transactions of investors throughout the world is of great shock for each one of them since this is where trust originates in the countries in which they wish to deposit their capital, taking into account especially political, economic, social and sometimes psychological factors in order to make an appropriate decision about the investment or the financial relationship that they wish to acquire with said country of study.
Country Risk in financial investments and transactions of investors throughout the world is of great shock to each of them and that's where confidence in the countries in which they wish to place their capital originates, taking into account especially political, economic, social occasions for up to psychological well make a proper decision on investment or financial relationship they want to purchase with that country study factors.
Introduction
This issue can not only be of importance to investors or those who carry out international trade; but we must take it into account each of us since this affects our daily life without realizing it. In Mexico, its level of country risk affects our economy on a daily basis, this will always be reflected in the interest rates of loans, mortgages, and each purchase that we make every day, that is why we must take into account what our country faces and the reliability that we can offer international investors to invest in our country.
Background
The importance of this country risk originated when the development of foreign trade began, and the set of international financial exchange; Investors discovered that financing from foreign and unknown clients would lead to mistrust and problems in the future as it was completely unknown with whom the transnational operation would be carried out.
The Country Risk is taken into account through the economic, political and social level of each country, thus making a variety of comparisons and adequate studies of these factors to determine the investment reliability of said country.
Mainly we will clarify the concept of Country Risk so that this topic is understandable:
Country risk is an index that attempts to measure the degree of risk that a country poses for foreign investments.
(Anzil) It is with this concept that we can realize that investors by focusing their capital in a certain place what they want is to maximize their profits and by carrying out the country risk study they will be able to realize whether the profits will be to a high or low degree even worse if it is only a loss of capital since the country finds itself with an inherent risk of the loss. The country risk index is actually an index that is calculated by different financial entities, generally international risk rating agencies. The best known are Moody's, Standad & Poor's, and JP Morgan.
3 types of Risks are established which we will mention below:
- Sovereign Risk: when an entity that is sovereign defaults with the payment of the debts acquired. Generic Risk: the whole set of entrepreneurs is focused on those who are not in adequate stability in all the areas in which they relate. Transfer Risk: it is found or is carried out according to the currencies of a country at a time presented and this accepts whether or not the capital and invested interests are paid.
There are also companies that calculate country risk, such as Euromoney or Institutional Investor. Each of them has its own method, but they usually reach similar results.
Risk factor's
- Analytical Indicators - 50% Economic Performance - 25% Political Risk - 25% Credit Indicators - 30% Debt Indicators - 10% Debt in Default or Rescheduled - 10% Credit Rating - 10% Market Indicators - 20% Access to Bank Financing - 5% Access to Short-Term Financing - 5% Discount for Default - 5% Access to Capital Markets - 5%
(Euromoney)
The EMBI is mentioned as the main indicator of Country Risk.
Now we will mention that those countries with high risk pay much higher interest than those countries with lower risk.
As an example we will take our country (MEXICO) giving the data of the historical minimum level of risk is 71 points, seen on June 1, 2007, and its maximum level is 624 basis points, reached on October 24, 2008.
Mexico has gone through high and low levels in terms of country risk, which have had an impact on the Mexican economy, but even so it has remained among the countries with the best scores in Latin America
Country Risk Table 2014. MEXICO - Country Risk (EMBI prepared by JP Morgan) Country Risk Table 2014.
Country Risk 2014.
(Castro, Retrieved on September 20, 2014, from UNAM Library)
Conclusions
The Country Risk issue in the world is of great impact for the entire business-financial status as this leads them to make appropriate decisions about the investment to be made in specific countries in the world but that is why they manage to achieve It counts through studies of the main country risk indicator (EMBI) how profitable a country is and the reliability that they can deposit their capital there, thus improving their profits.
That is why through this essay I try to make an adequate explanation in which each of us can have a basic knowledge about this subject since we are affected in daily life according to the risk that Mexico presents to the world at the level financial and this leads to a high rate of interest on credits and expenses that we make every day.
Bibliography
- Anzil, AF (nd). www.econlink.com.ar/definicion/riesgopais.shtml.Castro, AM (Retrieved on September 20, 2014, from Biblioteca UNAM). http://fcasua.contad.unam.mx/2006/1237/docs/1.pdf.Euromoney. (sf). www.econlink.com.ar/definicion/riesgopais.shtml.
