There are three important reasons for business and financial investors to analyze the risk of countries in which they are currently conducting business or plan to undertake new business ventures. First, country risk analysis can be used as a screening device to avoid countries with excessive risk. Events that heighten country risk tend to discourage foreign direct investment in a particular country.
A second reason for assessing country risk is that it can be used to monitor countries where the investor is currently engaged in business operations. If the risk level of a particular country begins to rise, the investor may consider divesting its investments into a less risky country within or outside the region. The third reason is to assess particular forms of risk for a specific project or investment type. Investors must manage the country risk/return tradeoff by closely assessing the country risk involved in engaging in foreign business and investment activities.
As Africa enters the new millennium, resource flows for development is one critical challenge the continent faces. Weak communication and stereotypical subjective qualitative analysis not only distort the quality of information on respective African countries but also ultimately stifle capital flows and international trade. The answer is a rational and quantitatively based research methodology that accurately describes the trends of economic, financial, social, and political factors that more accurately identify the current and future risk factors on a comprehensive and timely basis.
AMI Consultants provides quantitative country risk analysis that estimates the risk levels of African countries. An understanding of country risk would provide an assessment of the degree of risk involved in order to make rational business and investment decisions. The study would be particularly of great benefit to organizations that desire to do business in Africa or are currently doing business in the continent. The information provided would assist organizations evaluate the impact of a country’s political, financial and economic environment on their operations, cash flows or desired objectives. Perhaps, the most benefit of this approach to analyzing country risk is the screening process in which several countries present initial interest but only one country is needed without spending months of expensive qualitative research. Once a target country is identified, a more detailed analysis would then be conducted.
There are many methods that can be used for analyzing country risk including checklist approach (all the political, financial and economic factors are considered to determine trends at the macro and micro levels); quantitative analysis (measures the financial and political factors over a period of time with the goal of identifying the characteristics that might influence the level of country risk); Delphi technique (focuses on the collection of independent opinions); and personal visits (to assess the situation on the ground first hand).
The methodology adopted in AMI studies is an integrative statistical model, which utilizes a combination of data from various sources and incorporates several research methods. Information derived from the model is used to develop risk profiles of the political, financial and economic risk factors for the target country. From these quantified risks, the mean and risk dispersion of each component risk is calculated. The mean represents the risk average of a component risk, and the measurement of the risk dispersion is obtained by calculating the standard deviation of a component risk using Excel functions. When the mean and the standard deviation of each component are obtained the confidence interval estimation of each component risk is calculated at 95% confidence interval.
Next, the overall country risk score for the country is calculated. For the purpose of building an Excel spreadsheet for the country risk model, probabilities are assigned for political risk. The assigned probabilities are based on AMI’s perception regarding these factors in the target country.
The next level of analysis involves a Pareto analysis to arrange the relative importance of the weighted risk indices. A “t” test statistic is used to determine the comparative levels of the risk components using the seven-step approach of Daniel & Terrell (1995).* Based on the quantified country risk data, the regression analysis for each risk component for the country is predicted for six months into the future using Microsoft Excel TREND functions.
After obtaining the predicted targets, the significant differences for each component risk that impact to target country is determined. The calculation is carried out by One-Way Anova Decision to determine that the data provide sufficient evidence to indicate whether the target country has a differential effect by each component risk.
* Daniel, W. and Terrell, J. (1995) Business Statistics: For Management and Economics, 7th ed. Houghton Mifflin Company.
For details contact Dr. Innocent Abiaka at firstname.lastname@example.org or (602) 441-5667.