Topic 7 – Country Risk Analysis Methodology

ISSUE 7 – DATE 21 JULY 2015


This article attempts to discuss some common techniques that an analyst could use in analysing the country risk, and this is especially important in investing in power plants in emerging markets. These risks analysis comprises of both qualitative and quantitative measures and requires an analytical mind and creative thinking in application of the process. Most of these indexes could be obtained from public domain in the web.


    Gini Coefficient 0 = total social equality     |       1 = total social inequality
    Global Peace Index An attempt to measure the relative position of nations’ and regions’ peacefulness.
    Human Development Index Is a composite statistic of life expectancy, education, and per capita income indicators, which is used to rank countries into four tiers of human development.
    Youth Unemployment Is the unemployment of young people, defined by the United Nations as 14–28 years old. An unemployed person is defined as someone who does not have a job but is actively seeking work. It provides insight of the possibility of trouble on the road.


Indicators  Measurement Interpretation
1 Fiscal deficit/GDP, % Fiscal and monetary policy that measures ability of goverment in emerging economies in managing their annual spending. Persistently:-
>4% Alert/Concern
2%-4% Acceptable but needs monitoring
<2% Doing Well
2 Annual GDP% Annual growth prospect Persistently:-
<4% May mean that pet capita income is growing slowly or falling given a certain level of population growth
4%-6% Reasonable
6%-8% Doing Well
3 Current Account/GDP, % It measures the degree of competitiveness. A negative current account may be caused by imports that are greater than exports. Longer term this may mean that a country is facing and issue withs its level of competitiveness. This is negative to a country under evaluation. However, if the current account deficit is due to increase in investment (foreign in flows) into a country, this is positive factor that leads to agrowing economy. As a general rule, persistent negative current account requires monitoring. Persistently:-
Current account deficit over GDP  4% May me an uncompetitive to same degree
Current account deficit over GDP between 1% to 3% Probably sustainable, provided economy is growing
4 External debt/GDP, % This is a measure of debt burden in a country Persistently:-
>50% High debt burden which signifies potential in ability to sustain external borrowings at reasonable rates
>25%-50% No clear conclusion. Continue to monitor
5 Reserves/short tem debt(maturing in less than 12 months) If a healthy economy is defined as low level of debt and high reserves, then a healthy economy should have high reserve/short term debt. Conversely, a low reserves/short term debt is considered a risky economy. This measurement can also be stated in short term debt/reserves. <100% Or if Short term debt/Reserve is increasing and exceeding 100%, it is termed as a risky economy as there is not sufficient reserves to meet the short term obligations of debt providers.
>200% Sufficient healthy reserves to meet short term obligations



This article is prepared by Ong Tee Chin, CFA, FRM, and represents the view of the author. He can be contacted at for any further enquiries on the contents of this article.

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Chartered Financial Analyst
CFA Institute

Financial Risk Manager
Global Association of Risk Professionals (GARP)