PERCEPTIONS OF COUNTRY

RISK AND THEIR INFLUENCES

ON INTERNATIONAL MARKET
DEVELOPMENT AS
EVIDENCED BY TOWER
ASSOCIATES

The Challenge

Using specific criteria, Susan Brede, an

executive at Tower Associates, must
make a recommendation on which
country the private equity firm should
develop business.

What Criteria?

Political and economic stability

Well-functioning legal and accounting
systems
A favorable entrepreneurship environment
A supportive attitude toward foreign
investment
Some form of developed internal financial
market

A Historical Perspective
Currency crisis occurs when a speculative attack on the
exchange value of a currency results in a devaluation or sharp
depreciation of the currency. A currency crisis often forces the
government to defend the currency by expending large volumes
of international reserves and/or by sharply raising interest rates.
Financial crisis is a severe disruption in financial markets that,
by impairing a markets ability to function effectively, may result
in significant adverse effects on economic activity.
Foreign debt crisis occurs when a country cannot service its
foreign debt, whether sovereign or private.
Banking crisis results when actual or potential bank runs or
failures cause banks to suspend internal convertibility of their
liabilities, compelling the government to intervene to prevent
this extending large-scale assistance.

Short-term Indicators
Variations or changes in:
Stock market prices
Real estate prices
Real interest rates
Real exchange rates

Long-term Indicators

the debt service ratio

short-term debt as a percent of total debt
variable rate debt as a percent of total
debt
total foreign debt as a percent of GDP
the merchandise trade balance or current
account balance as a percent of GDP

Country A

A large advanced, developing country that had its

share of economic problems in the 1980s, but since
then has been performing relatively well.
Economic growth is strongly supported by the
government in terms of spending as a percent of GDP
and as measured by the deficit in the fiscal budget.
Domestic private investment as a percent of GDP, on
the other hand, is not strong.
Although money supply growth has been modest,
inflation remains high. The currency floats more or
less freely.

Country B

A large industrial economy that has experienced

volatile performance during the past decade.
It has vast resources including energy resources to
support continued transition to a more diversified
competitive economy.
Private business investment has been growing as a
percent of GDP while the role played by the
government has been declining.
During the upcoming year some significant
changes are expected in the political leadership of
the country, which could impact growth prospects.

Country C

A large developing country, well-endowed with

natural resources but lacking sufficiently developed
infrastructure to allow it to utilize them effectively in
support of GDP growth.
The economy is not yet a market economy, but is
moving in that direction as the government has
gradually liberalized its control.
It continues to influence consumer prices, interest
rates, and the exchange rate in order to prevent
deterioration in living standards for most of the
population.

Country D

A large developing economy, well-endowed with

natural resources but lacking the economic
infrastructure needed to capitalize on its wealth
efficiently.
The economy is moving in the direction of a
market economy and is very entrepreneurial with
wide disparity in income distribution.
Consumption represents only one-third of GDP.
The government continues to cautiously manage
consumer prices, interest rates, and the exchange
rate to keep the economy on its rapid growth path.

Conclusion

Country C with a country risk strategy

Final Thought

Tower Associates can arm itself with

strategies to avoid risk in the forms of:
Country risk
Foreign exchange risk
Liquidity risk
Market risk
Credit risk
Insolvency

References

Asiri, B.K. (2014). An empirical analysis of country risk ratings. Journal of

Business Studies Quarterly, (5)(4), pp. 52-67.
De Clercq, D. & Zhou, L. (2014). Entrepreneurial strategic posture and
performance in foreign markets: The critical role of international
learning effort. Journal of International Marketing, (22)(2), pp. 47-67.
DellAriccia, G. & Marquez, R. (2010 June). Risk and the corporate
structure of banks. The Journal of Finance, (65)(3), pp. 1075-1096.
Galai, D. & Wiener, Z. (2012 August). Credit risk spreads in local and
foreign currencies. Journal of Money, Credit and Banking, (44)(5), pp.
883-901.
Mathis, F.J., Keat, P., & OConnell, J. (2007 October 21). Country risk
analysis and managing crises: Tower Associates. Thunderbird School
Global Management.

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