Country risk includes a wide range of risks, associated
with lending or depositing funds, or doing other financial transaction in a
particular country. It includes economic risk, political risk, currency
blockage, expropriation, and inadequate access to hard currencies. Country risk
can adversely affect operating profits as well as the value of assets.
With more investors investing internationally, both
directly and indirectly, the political, and therefore economic, stability and
viability of a country's economy need to be considered.
Given below are the lists of some agencies that provide
services in evaluating the country risk.
- Bank of America World Information
- Business Environment Risk Intelligence (BERI)
- Control Risks Information Services (CRIS)
- Economist Intelligence Unit (EIU)
- Institutional Investor
- Standard and Poor's Rating Group
- Political Risk Services: International Country Risk
- Political Risk Services: CoplinO'Leary Rating System
- Moody's Investor Services
The risk of loss due to political reasons arises in a
particular country due to changes in the country's political structure or
policies, such as tax laws,
tariffs, expropriation of
assets, or restriction in
repatriation of profits. Political risk is distinct from other commercial risks,
and tends to be difficult to evaluate.
Some example of political risks are:
- Contract frustration by another country, government resulting in your
inability to perform the contract, following which the
buyer may not make payment and or / on demand bonds may be
- Government buyer repudiating the contract this may be
occur if there is a significant political or
economic change within the customer's country.
- Licence cancellation or non renewal or imposition of an
- Sanctions imposed against a particular country or company.
- Imposition of exchange controls causing payments to be
- General moratorium decreed by an overseas government preventing
- Shortage of foreign exchange/transfer delay.
- War involving either importing or exporting country.
- Forced abandonment
- Revoking of Import/ Exports licence.
- Changes in regulations.
The following are also considered as political risks in relation to exporting
- Confiscation of assets by a foreign government.
- Unfair calling of bonds.
Insurance companies provide political risk covers. These
may be purchased:
- On their own, covering only political risk on the sale to a
- For a portfolio of political risks.
- For the political risks in relation to the sale to another company in
your group (where there is a common shareholding and
therefore insolvency cover is not available).
- As part of a credit insurance policy.
A company can suffer financial loss, if export contract is
cancelled due to commercial or political reasons, even before the goods and
services are dispatched or delivered. In such a situation, the exposure to loss
will depends on:
- The nature of the contract.
- If the company can salvage any products and resell them
quickly, with a small amount of re working
- Any stage payments
- If servicing staff have left the country.
- The extent of the commitments to suppliers.
- The horizon of pre delivery risk
- The customer and country risks
insurance can be extended to cover predelivery risk, in particular, the risk of
customer insolvency predelivery or political frustration predelivery.
Some times predelivery cover can be extended included the frustration of a
contract caused by non payment of a pre delivery milestone, and or non payment
of a termination account, and or bond call.
Predelivery risks are often complicated and the wording of the cover is worth
It is to be noted that in the event that it was clearly unwise to dispatch
goods, credit risk (payment risk) cover would not automatically apply if the
company nonetheless went ahead and dispatched head them.
Binding contracts cover and
noncancelable limits are not included in predelivery cover. However, they
provide a commitment from the credit insurer that the cover for dispatches /
invoices will not be withdrawn without a prior notice.
If the company's customer is
overdue, or it is imprudent to dispatch, there is no credit insurance cover for
dispatches subsequently made, even where the company holds binding contract
cover or noncancelable limits.
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