Analyzing Country Risk
When you are ready to take your business abroad, it is imperative to your success that you be strategic, not reactive. Having your portfolio diversified across different countries will help you balance any potential volatility and risks.
There are, like most business decisions, many factors that need to be considered before a move to do business internationally. A country risk analysis – the weighing of economic, political, and business risks, is one of the things that need to be considered. Each country poses unique risks, (some more than others), and if you do not carefully evaluate each, you may have unexpected investment losses as a result.
A country risk assessment will do two things: help a business identify and evaluate country-specific risks, and help the business be prepared should a risk come to fruition. The importance of a country risk analysis cannot be overstated. International business brings many unknowns, and without assessing the risks carefully, a business could face unexpected and devastating changes without warning.
While there are hundreds, even thousands of factors to consider when taking your business international, risk factors can largely be put in to three categories: economic, political, and social factors.
Economic Risks
Economic risks stem from a country’s financial situation and their ability to repay debts. No country is immune to economic risk, even relatively stable countries. This was seen in the United Kingdom – after exiting from the European Union they saw currency fluctuations that had significant economic consequences.
There are key economic indicators that will provide a snapshot of a country’s economic stability and their prospects. This will help you paint a more complete picture when evaluating country risk. Some key economic indicators to look at are:
· Banks stability and solvency
· Debt-to-GDP ratio
· Unemployment rate
· Currency exchange rates
Political Risks
Political risks are direct impacts that stem from the decision’s politicians make about investments. Every country carries some level of political risk. Some signs of political risk are obvious, like war. Some are less obvious while equally important. While there are many, here are some key political risks to assess:
· Government stability
· Terrorism, violence, and crime
· Employment laws
Social Factors
Social factors are unique to a country and include things such as: belief systems and practices, customs, traditions, trends, and influences. It is important to see if a country has any social unrest or movements intended to bring about change, as these can impact your success within the country.
Other Ways to Narrow Down Your Decision
Analyzing risk is arguably the most important part of your decision when deciding what countries to bring your business to, but there are some other ways to narrow down your list to not only countries, but regions of countries. Other factors to consider are: setup costs, tax and regulatory climate, competition, workforce availability, shipping costs, and insurance needs.
Are you ready to grow and protect your business? Impello Global is a trade finance advisory boutique and trade credit and political risk insurance brokerage, headquartered in Seattle, Washington. We specialize in trade credit and political risk insurance and provide advisory services to companies and lenders who are looking to expand their trade finance capabilities.
If you are a company or a lender trying to better understand trade credit insurance or looking for guidance as to how trade credit insurance can help improve working capital financing, our team would be delighted to learn more about your business and discuss options available to you. Please visit our website at www.impelloglobal.com or contact us directly at info@impelloglobal.com.