Country Risk Management

Appendix B: Macroeconomic Factors

The first of these factors is the size and structure of the country’s external debt in relation to its economy. More specifically:

• The current level of short-term debt and the potential effect that a liquidity crisis would have on the ability of otherwise creditworthy borrowers in the country to continue servicing their obligations.

• To the extent the external debt is owed by the public sector, the ability of the government to generate sufficient revenues, from taxes and other sources, to service its obligations.

The condition and vulnerability of the country’s current account is also an important consideration, including:

• The level of international reserves, including forward market positions of the country’s monetary authority (especially when the exchange rate is fixed).

• The level of import coverage provided by the country’s international reserves.

• The importance of commodity exports as a source of revenue, the existence of any price stabilization mechanisms, and the country’s vulnerability to a downturn in either its export markets or the price of an exported commodity.

• The potential for sharp movements in exchange rates and the effect on the relative price of the country’s imports and exports.

The role of foreign sources of capital in meeting the country’s financing needs is another important consideration in the analysis of country risk, including:

• The country’s access to international financial markets and the potential effects of a loss of market liquidity.

• The country’s relationships with private sector creditors, including the existence of loan commitments and the attitude among bankers toward further lending to borrowers in the country.

• The country’s current standing with multilateral and official creditors, including the ability of the country to qualify for and sustain an International Monetary Fund (IMF) or other suitable economic adjustment program.

• The trend in foreign investments and the country’s ability to attract foreign investment in the future.

• The opportunities for privatization of government-owned entities.

Past experience has highlighted the importance of a number of other important macroeconomic considerations, including:

• The degree to which the economy of the country may be adversely affected through the contagion of problems in other countries.

• The size and condition of the country’s banking system, including the adequacy of the country’s system for bank supervision and any potential burden of contingent liabilities that a weak banking system might place on the government.

• The extent to which state-directed lending or other government intervention may have adversely affected the soundness of the country’s banking system, or the structure and competitiveness of the favored industries or companies.

• For both in-country and cross-border exposures, the degree to which macroeconomic conditions and trends may have adversely affected the credit risk associated with counterparties in the country.

Previous: Appendix A: Factors Affecting Country Risk Next: Appendix C: Social, Political, and Legal Climate