Our Framework of Country Risk Concepts

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Country Risk Concepts

Definitions of 15 Key Country Risk Concepts
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This post discusses some concepts that are important during your first steps in country risk analysis. It also offers you a one-page overview of 15 country risk concepts. It is based on the opening session of our Summer Schools. You can download the overview for free and use it as the basis for a more context-specific country risk analysis framework. Please note than an effective framework always requires adaptation and specification of the general suggestions in this post and the accompanying overview.

If you do one of our skills training sessions, your first challenge is to become familiar with the most important country risk concepts. Starting with country risk itself, it may at first seem confusing to discover that it is very hard to pin down. This makes however perfect sense. Its definition should be selected in line with the underlying analytical objectives. A related question is which country risk types are most important in a specific context. Banks for example are concerned about sovereign risk, collective debtor risk, convertibility risk and transfer risk. The last two play a central role in our Summer Schools. To get more familiar with these country risk types, please check our overview of 15 country risk concepts. The overview offers you a possible definition for these country risk types (and several other country risk concepts that are introduced below).

An effective country risk framework further requires the inclusion of at least 11 other concepts. The first two and most straighforward ones are creditor and debtor. These are of course essential concepts in banking and finance as a whole. Specifically in country risk, the locations where creditor and debtor reside are essential. Two other major concepts are counterparty risk and environment risk. They refer to the scope of country risk. In other words, the central concern is how many debtors may face payment difficulties. You can describe possible payment difficulties very well with the concepts arrrear and default, pointing at increasingly severe situations.

The concepts payment ability and payment willingness are important in both the assessment of country risk and the interpretation of arrears or default. Both also require a good understanding of the status of particular currencies in two ways. This applies to the currency in which the debt is denominated and the currency in which the debtor generates her/his earnings. If they are different, it could have a profound impact on country risk. If the debt is denominated in a hard (foreign) currency, while the earnings of the debtor are in a soft (local) currency, country risk is more elevated ande complex.

As I note above, our overview of 15 country risk concepts suggests definitions for each concept. These definitions seek to encouage you to reflect on the role that country risk plays in your research or business. They further should be seen as starting points for any (re-)development of a basic or comprehensive country risk analysis framework. Please feel free to change the definitions and add/remove concepts in line with the requirements of your research or business. Finally, the overview may also assist you identify the skills that you or your organisation need in order to develop such a framework. If you have any questions about the concepts, definitions or skills to develop a country risk analysis framework, please contact us.

These country risk concepts and their definitions are not adequate to deal with all activities in all countries under all circumstances. They should always be re-defined and re-conceptualized in line with either your analytical objectives or the operational context of your business.

Country Risk Concepts

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