Country Risk is the risk of exposure to loss caused by events associated with a specific sovereign / jurisdiction / country. Country risk manifests very differently for entities residing outside the country affected (and having exposure to it) versus entities that are residing within the affected country.
The concept is quite general and encompasses all forms of lending or investment activity whether to/with individuals, corporates, banks or government. In particular:
- the Sovereign Risk linked to the servicing of sovereign liabilities (and being primarily macroeconomic in nature)
- the Transfer Risk or ability to remit funds outside the jurisdiction and the closely associated
- Convertibility Risk (i.e. the risk a government imposes capital or exchange controls that prevent an entity from converting local currency into foreign currency) and finally
- Political Risk and other cases of force majeure (e.g. war, expropriation, revolution, civil disturbance, floods, earthquakes).
- The significant form of mitigation of country risk is the use of offshoring mechanisms, namely the immediate transmission of funds outside the sovereign jurisdiction
- Other forms include various types of insurance
Issues and Challenges
- Country Risk is a complex risk type, encompassing a range of possible events. Assessment of country risk must confront the size and complexity of the entities and interactions involved.
- During country risk events there are complex interactions between market (interest rates, fx) risks and credit risks
- Analyses of Country Risk are typically dominated by the views of developed economies' analysts versus risks in less developed countries