The Challenges
Develop a Country Risk Assessment model to assess country-specific risks for making informed investment decisions across different countries
With increasing globalization and expansion of trade between nations, measuring and analysing country risk has become a major concern for investors.
The Country Risk model developed by Auronova can capture country-specific risks by incorporating following dynamics that are not adequately reflected in country ratings provided by the external rating agencies:
The country risk assessment model takes into account country specific factors like political stability, macroeconomic condition, financial environment and other investment relating factors (ease of investment & disinvestment, taxation, etc.), while external rating agencies solely take country related credit risk into consideration
The model is fully customizable and allows the users to easily modify the model weights to meet their specific needs and requirements to conduct a more relevant investment assessment
Model further includes ESG risks, along with downgrade factors like geopolitical risk, natural calamities, supply chain disruptions, export and movement bans, and other force Majeure Risks, to take account for any unforeseen circumstances that may affect a Country’s stability and investment profile
Why Does Country Risk Exist?
Factors that contribute to Country Risk assessment
Economic Factors
Economic risks arise from factors such as inflation, exchange rate volatility, economic downturns, and fiscal mismanagement.
Political Instability
Political instability, frequent changes in government, and the potential for political unrest or violence can create an unpredictable environment for businesses.
Social and Cultural Factors
Social unrest, cultural differences, and issues related to labor strikes can create challenges for businesses operating in a particular country.
ESG Factors
Environmental, Social, and Governance factors include risks pertaining to environment safety, fair labor practices and human rights.
Quantitative Model To Measure Country Risk
Quantitative Modelling Steps to quantify Country Risk are mentioned below:
Scoring of Individual Themes
Each component under economic, political and social/cultural themes is assigned risk points based on their values
Risk Rating of Individual Themes
Based on the overall scores, a risk category is assigned to each of the themes, ranging from Very Low Risk to Very High Risk
Overall Country Risk Score and Rating
The risk ratings for these themes are then combined to provide the country’s weighted risk score and composite risk rating
Downgrade Factors
Factors like Geopolitical risk, Natural Calamity, Supply Chain Disruptions, Export and Movement Bans, and other Force Majeure Risk act as an overlay to Base Model Rating
Final Country Risk Rating Post Downgrades
The final risk assessment rating obtained after applying all applicable downgrades
What We Achieved
Market Selection
At the time of Investment
Portfolio Diversification
Risk Based Investment allocation
Risk Mitigation Strategies
Based on the specific risks identified by country risk assessment
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