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Risk Quantification: Country Risk Management Frequently Asked Questions

Gain a better understanding of how to turn qualitative country risk information into quantitative risk analysis and scores

Risk is more diffuse and interconnected than ever before, influenced by multiple spheres including geographic, political, sovereign, economic, commodity and industry developments. Our solutions combine the world's richest datasets and the largest network of local experts, award-winning analysts and data scientists, to help you identify, predict and act on today's complex, interconnected risk drivers. Get a 360-degree view of risk that spans geographic, political, sovereign, economic, commodity and industry risk that allow you to manage risk quickly and holistically across your organization.

Risk quantification Frequently Asked Questions

Country Risk Ratings

How do I measure country risk?
Our Country Risk numeration reflects qualitative analysis and forecasts. Qualitative definitions are provided for score bands within each risk type. The analysts use these definitions as guidance when setting the risk scores. The magnitude of each individual score is first defined by the qualitative definition. However, in order to cover a complex world, these definitions are broad. Scores are most useful when considered as part of the entire system. Thus, they can and should be considered relative across countries and risks.

Economists and country risk analysts score risks based on their own expert understanding of the countries' political, economic, social, and security environment, using economic models, information from open sources, and structured intelligence gathered by a network of thousands of in-country personnel. Daily written assessments highlight a country's changing conditions and inform the risk scores.



Financial Risk Ratings

What is country risk premium (CRP)
A country risk premium (CRP) represents the additional rate of return an investor requires to compensate for country risk. Therefore, when the CRP is added to the original WACC, the result is a higher discount rate inclusive of country risk.

Country risk is defined as the likelihood of future political, economic, and social developments in a country having a negative effect on the financial returns from an investment project. The Country Risk Investment Model (CRIM) calculates a CRP by evaluating the following sources of risk: contract enforcement; fiscal terms & conditions; political violence; business disruption; expropriation; cost & availability of resources; regulation change & application; profit repatriation & currency depreciation; export & domestic sales; corruption & crime.

How do I calculate country risk premium (CRP)?
Starting from a cash flow forecast for the investment project and a WACC that is not yet adjusted for country risk, The Country Risk Investment Model (CRIM) calculates the change to important investment factors, including the country risk premium (CRP), in eight steps:

  • Identifies risk events that may cause losses in cash flow over the life of the investment
  • Calculates the cash flow loss if each risk event occurs
  • Assesses the probability of the risk events occurring in the country of location
  • Calculates expected cash flow losses from each risk event as the product of the loss calculated in 2) and the probability of event occurrence assessed in 3)
  • Deducts expected losses from the original cash flow forecast
  • Calculates using the original WACC the NPV for the original cash flow forecast and for the same forecast adjusted for expected losses
  • Calculates the WACC that would reduce the original NPV to the adjusted NPV
  • Calculates the CRP as this higher WACC minus the original WACC

How do I calculate risk premium economics?
Country risk is defined as the likelihood of future political, economic, and social developments in a country having a negative effect on the financial returns from an investment project. The Country Risk Investment Model (CRIM) calculates a CRP by evaluating the following sources of risk: contract enforcement; fiscal terms & conditions; political violence; business disruption; expropriation; cost & availability of resources; regulation change & application; profit repatriation & currency depreciation; export & domestic sales; corruption & crime.

What is risk rating in banking?
Our Banking Risk Rating System (RRS) assesses the present level of risk that a rated banking sector will face a systemic crisis over a three-year time horizon. IHS Markit takes a top-down approach to analyzing banking sector risk. By focusing on broad conditions present in the banking sector, we are able to identify the types of trends and vulnerabilities that have proven to be key early warning signs of historical banking crises.

A careful examination of the history of historical banking crises shows that it is extremely rare for a major banking institution to fail in isolation. Such occurrences are typically caused by instances of fraud or other malfeasance that are exceedingly hard for even the most detailed examinations to detect ex ante. Instead, almost all major banking institution failures occur in the context of a broader banking crisis. This is because major institutions in a given banking sector act in substantially similar ways. More granular analysis of individual banking institutions often fails to recognize this, focusing excessively on individual franchise differences. From the standpoint of assessing risk of bank failure, these smaller differences typically pale in comparison with the importance of the broader, common financial position of the sector. Our RRS focuses on assessing these more fundamental factors.



ESG Risk Ratings

How to calculate sovereign ESG risk
Our sovereign ESG numeration reflects qualitative analysis and forecasts, focused on country-level risks that impact investment and operating environment. IHS Markit’s expert team of macroeconomists and country risk analysts score risks based on their own expert understanding of the countries' political, economic, social, regulatory, and security environment. They draw on in-house macroeconomic forecasting models, information and data from open sources, and structured intelligence gathered by a network of thousands of in-country personnel. Daily written assessments highlight a country's changing conditions and inform the risk scores. In addition to in-house expertise and models, analysis draws on experts in the field and in-country sources with proven records of reliability.

Our sovereign ESG numeration reflects qualitative analysis and forecasts of ESG as a set of scores. Qualitative definitions are provided for score bands within each risk type. The analysts use these definitions as guidance when setting the risk scores. The magnitude of each individual score is first defined by the qualitative definition. However, in order to cover a complex world, these definitions are broad. Scores are most useful when considered as part of the entire system. Thus, they can and should be considered relative across countries and risks.



Political Risk Ratings

What is political risk?
Political risk is defined as the likelihood of future political developments in a country having a negative effect on the operations and investments in that country. For political risk, categories include Government instability, Policy instability, and State failure.

How do I calculate political risk?
Our Country Risk political numeration reflects qualitative analysis and forecasts of political risk as scores. Qualitative definitions are provided for score bands within each risk type. The analysts use these definitions as guidance when setting the risk scores. The magnitude of each individual score is first defined by the qualitative definition. However, in order to cover a complex world, these definitions are broad. Scores are most useful when considered as part of the entire system. Thus, they can and should be considered relative across countries and risks.

How can an organization manage political risk?
Organizations often use these scores in benchmarking exercises, helping them manage political risk across their organization. Benchmarking helps an organization understand relative risk. This approach easily integrates country risk into already existing risk models, and is commonly deployed to set ‘traffic light’ systems for Go/No Go decision-making.



Economic Risk Ratings

What is economic risk
Economic risk is defined as the likelihood of future economic developments in a country having a negative effect on the operations and investments in that country. For economic risk, categories include Recession, Inflation, Currency depreciation, Capital transfer, Sovereign default and Under-development.

How to manage economic risk in international business
Our Country Risk economic numeration reflects qualitative analysis and forecasts of economic risk as scores. Qualitative definitions are provided for score bands within each risk type. The analysts use these definitions as guidance when setting the risk scores. The magnitude of each individual score is first defined by the qualitative definition. However, in order to cover a complex world, these definitions are broad. Scores are most useful when considered as part of the entire system. Thus, they can and should be considered relative across countries and risks.

How to manage economic risk
Organizations often use these scores in benchmarking exercises, helping them manage economic risk across their organization. Benchmarking helps an organization understand relative risk. This approach easily integrates country risk into already existing risk models, and is commonly deployed to set ‘traffic light’ systems for Go/No Go decision-making.



Terrorism Risk Ratings

What is terrorism risk
Terrorism risk is defined as the probability and impact of violence by non-state armed groups (NSAGs) in a country/location and whether the violence is likely to threaten or cause property damage and/or death/injury to achieve political change.

Our Country Risk numeration reflects qualitative analysis and forecasts of terrorism risk as a score. Qualitative definitions are provided for score bands within each risk type. The analysts use these definitions as guidance when setting the risk scores. The magnitude of each individual score is first defined by the qualitative definition. However, in order to cover a complex world, these definitions are broad. Scores are most useful when considered as part of the entire system. Thus, they can and should be considered relative across countries and risks.

How do companies manage terrorism risk
Terrorism risk can be managed by comparing exposure to terrorism to people and assets across an organization and using mitigation measures where necessary to lower the risk to those people and assets. Mitigation measures may include additional screening and security, or not operating in a certain location.

Organizations often also use terrorism scores in benchmarking exercises, helping them manage terrorism risk across their organization. Benchmarking helps an organization understand relative risk. This approach easily integrates country risk into already existing risk models, and is commonly deployed to set ‘traffic light’ systems for Go/No Go decision-making.



Experts

Alexia Ash

Ms. Ash is a quantification expert within the country risk team. She is experienced at using methods including risk indexing, stochastic processes, Bayesian modelling, and regression analysis. She was on the development team for Every Point on the Planet (EPOP), IHS Markit's flagship country risk mapping tool. She has worked on projects for private sector clients to provide probabilistic modelling of terrorist attacks by specific location and time frame; to design methodology to identify percentage probabilities for scenarios affecting food and water security in the Middle East; and to model the impact of economics and country risk on asset investments. Ms. Ash holds a Bachelor of Arts in mathematics, as well as a Bachelor of Arts in political science from the University of Florida in the United States, and Master of Science in global political economy from the London School of Economics (LSE), United Kingdom.

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Justin Valentino

In his current role, Justin works on methodological development and inputs for the country risk investment model and creates new indices and innovative risk solutions. He works closely with financial markets, corporate security and insurance clients in advising how to integrate risk scores into credit risk and geopolitical evaluation models and provides custom scoring solutions. Prior to joining IHS Markit, Justin was a researcher at The Mosakowski Institute for Public Enterprise performing database creation and geospatial. He holds an M.S. in Economics from Clark University in Worcester, Massachusetts. His specialization was in development economics and spatial econometrics with a focus on the economics of conflict in the Maghreb and Sub-Saharan Africa.

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Keerti Rajan

The Integrated Research team works with our experts to combine proprietary data and insights from across economics, country risk, and industry teams to create holistic, forward-looking analysis that helps our clients make effective business decisions. He has previously led the Asia-Pacific desk and the Political Risk desk for our Country Risk team where he was responsible for the global calibration of political and business risks and development of the Country Risk team's methodology. Before joining IHS Markit, he assessed systemic credit and liquidity risks to UK financial stability for the Bank of England; built stochastic models to forecast capital adequacy for financial companies at Moore Stephens Consulting; and worked in RBS's equity derivatives business.He earned a Ph.D. in political economy at the University of Cambridge with a thesis on the social epidemiology of income inequality in India. His previous academic work compared Indonesia and Malaysia during the Asian Financial Crisis.

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