The country risk is an economic / financial concept with regard to the possibility of changes in the business environment of a country , which negatively impact the value of assets of foreign individuals or companies in that country. The country risk is intended to indicate the degree of economic instability, political and financial of a country. In this way, it is nothing less than the credit risk assessment that foreign investors and companies are subjected to when investing in a country.
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The country risk is measured based on the government bonds of short, medium and long-term issued by the federal government. This is related to the government’s default level. To reach a result, the rating agencies consider some factors, which can be:
- Fiscal Deficit;
- Financial System;
- Economic and financial indices;
- GDP;
- Political Environment;
- Among others.
Country risk: security of the market and financial assets held in the country
It is important to highlight that there are many bad consequences with the increase in country risk , the most representative of which is the flight of foreign capital by country from some of the large investment funds , which has a policy of investing only in countries with low risk. . Thus, they reduce the available resources, which means that we have less investment in the economy, and finally, less job creation rates.
Another important impact is the cost of capital, which makes the government and other companies more difficult to obtain loans abroad with more advantageous terms. This means that we have fewer foreign currencies in the economy, and a devaluation of the Real against these currencies.
The relationship between the influence of country risk in financing and investment decisions can be explained in a simple way: the greater the risk of a country, the greater the surcharge paid to the foreign Treasury. This means that the result of this index implies a higher interest rate on the government bond.
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The main consequence of the increase in country risk is the lower attraction of foreign investment to the national financial market , which leads to less economic growth. This can lead to increased unemployment, and lower wages for the population.
This is because companies find it more difficult to seek and obtain financing in other countries. At the same time, there is an increase in the basic interest rate of the economy, which causes a more significant cost impact. Thus, the risk of a country is the main marker in the decision-making of investors , who may or may not lend money to the financial market and to the institutions that are in it.
Every type of investor, beginner or experienced, needs to have a clear awareness of what country risk is about, so that, whenever news about this financial parameter comes up, the warning signal can be turned on with regard to the economic situation. long-term investment portfolio.
