Country Risk Assessment - 160592857366.free.fr

1 WU048-Bouchet-FMWU047-BouchetApril 16, 200316:34 Char Count= 0 Country Risk AssessmentA Guide to Global Investment StrategyMichel Henry BouchetEphraim ClarkandBertrand GroslambertiiiWU048-Bouchet-FMWU047-Bouc hetApril 16, 200316:34 Char Count= 0 CopyrightC 2003 John Wiley & Sons Ltd, The Atrium, Southern Gate, Chichester,West Sussex PO19 8SQ, EnglandTelephone (+44) 1243 779777 Email (for orders and customer service enquiries): our Home Page on or Rights Reserved. No part of this publication may be reproduced, stored in a retrieval systemor transmitted in any form or by any means, electronic, mechanical, photocopying, recording,scanning or otherwise, except under the terms of the Copyright, Designs and Patents Act 1988or under the terms of a licence issued by the Copyright Licensing Agency Ltd, 90 TottenhamCourt Road, London W1T 4LP, UK, without the permission in writing of the to the Publisher should be addressed to the Permissions Department, John Wiley &Sons Ltd, The Atrium, Southern Gate, Chichester, West Sussex PO19 8SQ, England, or emailedto or faxed to (+44) 1243 publication is designed to provide accurate and authoritative information in regard tothe subject matter covered.

2 It is sold on the understanding that the Publisher is not engagedin rendering professional services. If professional advice or other expert assistance isrequired, the services of a competent professional should be Wiley Editorial OfficesJohn Wiley & Sons Inc., 111 River Street, Hoboken, NJ 07030, USAJ ossey-Bass, 989 Market Street, San Francisco, CA 94103-1741, USAW iley-VCH Verlag GmbH, Boschstr. 12, D-69469 Weinheim, GermanyJohn Wiley & Sons Australia Ltd, 33 Park Road, Milton, Queensland 4064, AustraliaJohn Wiley & Sons (Asia) Pte Ltd, 2 Clementi Loop #02-01, Jin Xing Distripark, Singapore 129809 John Wiley & Sons Canada Ltd, 22 Worcester Road, Etobicoke, Ontario, Canada M9W 1L1 Wiley also publishes its books in a variety of electronic formats. Some content that appearsin print may not be available in electronic of Congress Cataloging-in-Publication DataBouchet, Michel risk Assessment / Michel Henry Bouchet, Ephraim Clark, and Bertrand (Wileyfinance series)Includes bibliographical references and 0-470-84500-7 (cased : alk.)

3 Paper)1. Investments, Foreign. 2. Country risk. I. Clark, Ephraim. II. Groslambert, Title. IV. 3 dc212003041162 British Library Cataloguing in Publication DataA catalogue record for this book is available from the British LibraryISBN 0-470-84500-7 Typeset in 10/12pt Times by TechBooks, New Delhi, IndiaPrinted and bound in Great Britain by TJ International Ltd, Padstow, Cornwall, UKThis book is printed on acid- free paper responsibly manufactured from sustainable forestryin which at least two trees are planted for each one used for paper 16, 200316:34 Char Count= 0 ContentsPrefaceixAcknowledgmentsxiForewo rd by Campbell R. Harveyxiii1 An historical Outline of the book4 References72 An Overview of Country A Review of the The Definitions of Country Sources of Types of The historical Different Classification and examples of Country Natural Socio-political Country -specific economic risk22 References253 The Economic and Financial Foundations of Country Risk Relative price effects: The elasticities Income effects: The absorption Stock adjustments: The monetary Stock adjustments: The portfolio balance Country risk: Ratio analysis42 References47vWU048-Bouchet-FMWU047-Bouch etApril 16, 200316:34 Char Count= 0viContents4 Country Risk Assessment Methodologies.

4 The Qualitative, StructuralApproach to Country Analysis of welfare and social indicators of the development Analysis of the macroeconomic structures of External indebtedness, liquidity and solvency The savings investment gap and domesticfinancial Growth, crisis and The qualitative aggregate approach to political Conclusion72 References755 Assessment Methodologies: Global Country risk Specialized Export credit Summary of global Country risk ranking Country credit Credit rating Moody Standard & Poor Country rankings published in Summary of Country credit rating Conclusion109 References1106 Econometric and Mathematical Discriminant Logit and probit Regression analysis and model Monte Carlo Value at risk (VaR) VaR for a single-asset VaR for a two-asset Other methods for Estimating Principal components Non-linearities and non-parametric Artificial neural Multicriteria127 References1297 Risk Credit Probabilities of default using historical data133WU048-Bouchet-FMWU047-BouchetApri l 16, 200316.

5 34 Char Count= Probabilities of default using interest rate Probabilities of default usingfirm Loss given Credit value at Credit VaR, default correlation and Investment Adjusting the expected Adjusting the discount The Macro Measuring political risk as an insurance premium145 References1478 International Portfolio Investment Modernfinancial International portfolio investment and Country risk The international portfolio investment Impact of Country risk on international portfolio International International Capital Asset Pricing The Limits of the The normal Portfolio The The Bank of America The Goldman Sachs The JP Morgan Conclusion165 References1669 Financial Crises in Emerging Market Countries: An Historical Historical Economic growth-cum-debt Bonds versus The rising importance of commercial bank lending in thepost-WWII The debt crisis and the market-driven menu Solving the debt Phase I Buying time with Phase II The new money Phase III The official concerted approach to debt Debt reduction The way forward in the early 2000s: Back to the 1890s?

6 The return of private The return of bondholders189WU048-Bouchet-FMWU047-Bouc hetApril 16, 200316:34 Char Count= rise in emergence of : The Brady Plan at work in EMCs192 References19510 Country Risk and Risk Mitigation The role of national export credit The role of official multilateral risk guarantee The World Bank s co-financing The role of the International Finance The role of MIGA (Multilateral Investment Guarantee Agency) The risk mitigation role of public and private risk The role of private providers of specialist insurance for Country The market-based menu The rise of the London Club debt secondary market of emergingmarket Price Technical supply and demand factors affecting debt Debt conversion Mechanics of debt Range of debt conversion Official bilateral debt Debt conversion: A positive sum game?

7 218 References22011 Country Risk Assessment : A Matter of Informationand Intelligence Solvency and liquidity risk: The supply of debt-related Official sources of Country risk data and Private sources of Country risk data and FDI-related Country risk The role of specialized Country risk Assessment National public and private information Think-tanks and risk analysis Conclusion243 Appendix: External debt, official information sources244 References245 Glossary247 Index265WU048-Bouchet-FMWU047-BouchetApr il 16, 200316:34 Char Count= 0 PrefaceFor a long time, Country risk belonged to the category of issues that are difficult to understandbecause information is fragmented or incomplete. Banks knew neither the size of their loanexposure nor to which countries they had lent. Bankers were mesmerized by internationaleurocredit syndication.

8 Corporations and investors had neither the information nor the meansto assess, much less cover, the risks lurking in the shadows of seemingly profitable cross bordertransactions. Country risk was considered an opaque, unpleasant fact of life better left in thehands of the IMF and the export credit today s global economy wired to the web, however, all this has changed. Informationhas become abundant, cheap and almost instantaneous as countries compete in transparency toattract foreign direct investment and portfolio capital. The problem is no longer a lack of timelyinformation. It is rather one of deciding which information is important and then knowing howto process it. Country risk involves complex combinations of macroeconomic policy, structuraland institutional weakness, bad governance, and regional contagion wrapped in a paradigm ofhigh levels of trade, capital and aim of this book is to provide the framework for understanding the nature of countryrisk, its sources and its consequences as well as the tools available for judicious Country riskassessment in the context of international business and investment.

9 It does so by combiningtheoretical analyses with a number of practical observations that stem from the authors marketexperience with the modest hope of shedding light on a complex but fascinating 16, 200316:34 Char Count= 0 AcknowledgmentsA number of our colleagues gave us the benefit of their comments and criticism as we werewriting this book. We are deeply grateful to them and to our respective institutions, CERAMS ophia Antipolis, ESC Lille and the University of Middlesex. The project of this book receiveda decisive impetus at the time of the 2001 Finance Symposium jointly organized by IAFEand the CERAM Global Finance Chair that gathered a number of keynote speakers fromthe international academic community, the rating agencies, the banking industry, and officialfinancial institutions. Lively and fruitful discussions involved a unique combination of scholarsincluding Nobel Laureate Dr.

10 Myron Scholes and Dr. Beno t Mandelbrot, as well as panelistsfrom official institutions such as the ECB, the World Bank, the NY Fed and the BIS. We alsowish to thank Michael Payte (Europe Chairman of the International Association of FinancialEngineers) and Michael Howell (Crossborder Capital) for useful inputs, as well as Stefano Gori,Georg Merholz, Christoph Moser, and Madjid Touabi for valuable research assistance. We arealso indebted to many colleagues in the markets and the scholarly community; too numerous toname individually in this restricted space but nonetheless the target of our everlasting 16, 200316:34 Char Count= 0 ForewordBy Professor Campbell R. HarveyWhen I began working in emerging markets more than 10 years ago, the topic was notfashionable and received little attention, mainly because of the cost associated with ob-taining comprehensive information, and due to a lack of quality and timely data.