This is an easy to read comprehensive guide to Country Risk analysis written by a practitioner with over 30 years’ experience in the sector. It draws on lessons learnt from the crisis in 2008 to propose a balanced approach to modelling Country Risk.

Country Risk is what can go wrong when business is conducted across borders and is defined in the book as the losses that could arise as a result of the interruption of the operations of entities engaged in cross-border investments caused by country events, as opposed to commercial, technical or management problems specific to the transaction.  Examples are provided that show that it is necessary to analyse not only the risks of a payment crisis arising from vulnerabilities in the economic and political structure of a country but also from external shocks caused by international economic and geopolitical crises.

Several components to Country Risk are discussed including sovereign risk, transfer and convertibility of risks, operational and jurisdictional risks, political and geopolitical risks and economic risks. Of these, sovereign risk, relating to the risk of non-payment of sovereign (government) debt issues by public or publically guaranteed entities, is the most measurable. For this reason it is seen to conform to the definition of risk where it is possible to attach a probability specific to the risk. The rest of the risks that are identified (especially arising from political risk) are not conducive to measurement and as such are considered more in the realms of uncertainty. However it is noted that just because it is not possible to apply probability theory does not mean that the risk cannot be managed.

Country Risk can be assessed at the global level and the book explains the association between the historical cluster of defaults and the movements of international capital flows, the contagion risks and the possible cyclical pattern of the global economy. The aim is to manage country credit risk better by having a big picture and historical perspective of global crises. There is also discussion of how to analyse the vulnerabilities of natural economic and political situations to global pressures and of home-grown country risks that cause excessive borrowing. 

Turning to the modelling of Country Risk, the limitations of using econometric and mathematical techniques to imply causality or predictability are highlighted and instead a more practical approach to risk assessment is advocated. This involves quantifying and measuring Country Risk on a relative basis and then trying to quantify sovereign debt default risk. Whilst this may not allow payment crises to be predicted, it allows a measure of the relative riskiness of countries and can signal if the risk have risen, at any given time and for any given country, relative to others.

The risk model proposed provides a forward-looking framework that combines external factors affecting credit-worthiness and the domestic imbalances. It differs from the standard risk rating models as it includes indicators relating to external push factors. These include indications of cyclicality and imbalances in systemically important global financial centres. Other more standard indicators are included which measure country vulnerability to external shocks and in-country political and economic features, or fundamentals. It is stressed that not all indicators will be relevant for every country and the model that is constructed will need to accommodate the different structure and level of development of an economy.

The guide indicates that ratings models can flag risks and warn of deteriorating conditions; but risk management structures are required that ensure an effective and timely response. Some suggestions are made of best practice for organising country risk management drawing on principles set out by the Financial Stability Board. Finally, as the last line of defence, the guide suggests how risks can be mitigated at a transactional level.

In conclusion, the guide provides a step by step approach to define, identify, analyse, model, mitigate and manage Country Risk.  While acknowledging that there are no easy formulas for managing Country Risk it shows that risks can be effectively managed by tailoring the approach to suit different purposes at different times. The book draws on case studies of countries with multiple country risk vulnerabilities and featuring geostrategic risks, as well as case studies of projects showing how to structure a transaction to mitigate country risks.