Investing Overseas: Country Risk

Investors should consider additional risk factors before investing overseas. First there is country risk, which refers to the risk that arises from investing or doing business in a particular country. This risk depends on the country’s economic, political, and social environment. Countries with stable economic, social, political, and regulatory systems provide a safer climate for investment, and therefore less country risk, than less stable nations. Examples of country risk include the risk associated with changes in tax rates, regulations, currency conversion, and exchange rates. Country risk also includes the risk that property will be expropriated without adequate compensation, as well as new host country stipulations about local production, sourcing or hiring practices, and damage or destruction of facilities due to internal strife.

Measuring Country Risk

Various forecasting services measure the level of country risk in different countries and provide indexes that measure factors such as each country’s expected economic performance, access to world capital markets, political stability, and level of internal conflict. Country risk analysts use sophisticated models to measure it, thus providing corporate managers and overseas investors with a way to judge both the relative and absolute risk of investing in a given country. A sample of recent country risk estimates compiled by Institutional Investor is presented in the following table. The higher the country’s score, the lower its estimated country risk. The maximum possible score is 100.

The countries with the least amount of country risk all have strong, market-based economies, ready access to worldwide capital markets, relatively little social unrest, and a stable political climate. Switzerland’s top ranking may surprise you, but that country’s ranking is the result of its strong economic performance. You may also be surprised that the United States was not ranked in the top five—it is ranked sixth.

Arguably, there are fewer surprises when looking at the bottom five. Each of these countries has considerable social and political unrest, and none has embraced a market-based economic system. Clearly, an investment in any of these countries is a risky proposition.

Top Five Countries (Least Amount of Country Risk):

Rank   Country           Total Score

1          Switzerland     95.6

2          Germany         94.6

3          Netherlands     94.5

4          Luxembourg    93.9

5          France             93.6

Bottom Five Countries (Greatest Amount of Country Risk):

Rank   Country           Total Score

141      Sudan             8.7

142      Liberia             8.6

143      Afghanistan     6.5

144      Sierra Leone   6.4

145      North Korea    6.2

This country risk rankings is based on their socio-economic environment and related trends in last decade. Although, in long-run this ranking may be interchanged.