Country Risk Index

1 Country Risk Index Fitch Solutions' Country Risk Index (CRI) provides a composite score from 0 (low) to 100 (high), based on our five individual risk indices: Long-Term Political Risk Short-Term Political Risk Long-Term Economic Risk Short-Term Economic Risk Operational Risk The CRI quantifies the risk of a shock, such as an economic crisis or a sudden change in the political environment that would affect those conducting business within a Country , territory, or special administrative region. The composite CRI is made up of the mean average of six risk Index components: 2 Political Risk indices, 2 Economic Risk indices (in each case there is one Short- and one Long-Term Index ) to reflect the different timeframes and types of political, security and economic risks that investors are exposed to in a market.

2 For example, an autos manufacturer that exports cars to a Country has a different type of risk exposure than one that has established a factory in the Country and will be confronting more structural characteristics of the economy and the policy environment. Operational Risk is given a double weighting in the CRI to account for the fact that this Index is not broken down into short-term and long-term. This is because, unlike Economic and Political Risk, Operational Risk assesses the status quo, rather than Fitch Solutions' projections for the coming years.

3 It is an assessment of the current state of affairs in the business environment and how this affects investors' ability to operate within a given market. To increase visibility of the key areas of risk which again may vary from client to client each Index is divided into sub-components, which are weighted according to their respective importance in terms of impacting stability and the overall investment climate. Long-term Economic Risk, Operational Risk, Short-term Economic Risk, Short-term Long-term Political Risk, Political Risk, Political Risk The Political Risk Indices evaluate the risk of a sharp change in government policy and broader political stability.

4 Our definition of long-term' is not fixed, but is understood to mean a decade-long period. Our definition of short-term' is the current and subsequent year, , a one- to two-year period. Long-Term Political Risk Index (LTPRI) Short-Term Political Risk Index (STPRI). The Long-Term Political Risk Index assesses a Country 's structural The Short Term Political Risk Index assesses pertinent political risks political characteristics based on our assumption that liberal, to investment climate stability over a shorter time frame, up to 24. democratic states with no sectarian tensions and broad-based months forward.

5 The STPRI components are best viewed as Fitch income equality exhibit the strongest characteristics in favour of Solutions' assessment of whether the government can deliver its political stability, over a multiyear timeframe. It is Fitch Solutions' chosen agenda, without facing civil unrest, gridlock in policy making, view that this offers a template for greater long-term stability as or regional external threats within the short to medium term. (a) opposition to the incumbent government can be resolved The STPRI's four components are: within the existing system; (b) the elected elite has sufficient power to govern ( , enforce its policies within the state's territory), Policymaking process (25%) This assesses the and (c) there are only limited existential threats to the prevailing government's ability to propose, pass and implement its policy.

6 Constitutional order from an alternative world view. Broadly speaking, it addresses how the characteristics of the polity constrain/enable the executive. The LTPRI's four components are: Social stability (25%) This evaluates the short-term risks Characteristics of polity (30%) This assesses how well the posed by any weaknesses in the economy or society via institutions of the state cohere with a liberal democratic state unemployment, inflation and public unrest. with strong, formally separate institutions and safeguards to Security/external environment (25%) This evaluates protect minority rights.

7 Threats to the government's ability to act as sovereign arising Characteristics of society (30%) This assesses the state's from direct challenges to its rule; terrorism and armed income distribution, poverty levels, and ethnic characteristics. secessionism, regional tensions; and constraints on its actions Scope of state (20%) This evaluates the government's ability by multilateral agencies/major powers. to act as sovereign, , both on a domestic and external basis. Policy continuity (25%) This is directly linked to the Policy continuity (20%) This component assesses the corresponding LTPRI.

8 Here, we assess likely policy continuity and stability of policy direction over a decade-long period, which for make explicit reference to the electoral cycle, and the risks of an most states will encompass a change of government. un-constitutional transfer of power ( , coup or popular uprising). Political Risk Index (100%). Long Term Political Risk (50%) Short Term Political Risk (50%). Characteristics of Polity (30%) Policy-making Process (25%). Characteristics of Society (30%) Social Stability (25%). Scope of State (20%) Security/external Environment (25%).

9 Policy Continuity (20%) Policy Continuity (25%). Economic Risk The Economic Risk Index assesses the degree to which the Country balances effectively non-inflationary growth, contains fiscal and external deficits, and maintains manageable debt ratios. The indices use Fitch Solutions' historical data and forecasts: as data is revised and forecasts change, so the scores within the indices change. Long-Term Economic Risk Index (LTERI) Short-Term Economic Risk Index (STERI). The LTERI takes into account the structural characteristics of The STERI seeks to define current vulnerabilities and assess real economic growth, the labour market, price stability, exchange rate GDP growth, inflation, unemployment, exchange rate fluctuation, stability and the sustainability of the balance of payments, as well as balance of payments dynamics, as well as fiscal and external debt fiscal and external debt outlooks.

10 The Index is calculated by looking credentials over the coming two years, using the current year as at the previous five years of economic data and our forecasts for a reference point. This skews the STERI in favour of economies the next five years. A number of other structural factors are also with low twin deficits (current account and fiscal) or surpluses, taken into account, including dependence on the primary sector, low inflation and higher growth rates. There is also a subjective reliance on commodity imports, reliance on a single export sector, component, which measures the perceived independence of the and central bank independence.