Our Template for Country Risk Reports

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Country Risk Reports

Objectives of this tutorial

This tutorial offers you advice on the objectives, structure and analytical aspects of country risk reports. Moreover, you can also freely download our Country Risk Reports Template here. We use the template during our in-house training sessions and Maastricht Summer School.

Structure of country risk reports

Like most reports, country risk reports start with introduction and conclusion. Further below, I explain which questions could be relevant here. The core part of country risk reports consists of sections that discuss the impact of macro-economic and political risk indicators on the risk of a country. Below, you find an example of a structure for country risk reports.

1. Introduction
2. Internal Economic Situation
3. External Economic Situation
4. Internal Political Situation
5. External Political Situation
6. Conclusions
7. Bibliography
8. Annexes

Introductory section

In the introduction, the following sub-sections and questions could be helpful.

Target Audience
Who is target audience of your country risk reports?

Selected Countries
Which country do you analyze in your country risk reports? What are general features of this country? Does the country have a hard currency? Is it an Emerging Market or Developing Country?

Report Objectives
Do your country risk reports refer to a particular transaction in a country, or on the country strategy for all operations? Do they seek to support the case for a particular rating, limit on transaction amount or ceiling for total country exposure?

Timeframe
To which period does the country risk analysis refer? To the next twelve months, three years or five years?

Risk Definitions
How do you define country risk in your country risk reports? Country risk could for example refer to both:

Convertibility Risk (CR), the likelihood that a debtor in a country cannot exchange local-currency into foreign-currency due to government restrictions or lack of foreign-exchange reserves, and

Transfer Risk (TR), the likelihood that a debtor is not able to transfer foreign currency to another country to fulfill a foreign-currency payment obligation to creditor abroad due to government restrictions or lack of foreign-exchange reserves

Sections on macro-economic and political risk indicators

You could use one section each for macro-economic and political risk indicators. Alternatively, you could use two sections each for these indicator categories that address respectively internal (domestic) and external (foreign) trends.

The internal economic section could then have various sub-sections, such as:
-Economic Structure
-Business Cycle
-Economic Policy

The same applies to the external economic section, with these possible sub-sections:
-Balance of Payments
-External Solvency
-External Liquidity

For the internal/external political sections, sub-sections could be helpful as well.

You can use the following questions to select indicators for your country risk reports:
1. Which risk indicators raise growth potential of internal economy?
2. Which risk indicators reduce growth potential of internal economy?
3. Which risk indicators raise vulnerability of internal economy?
4. Which risk indicators reduce vulnerability of internal economy?
5. Which risk indicators raise growth potential of external economy?
6. Which risk indicators reduce growth potential of external economy?
7. Which risk indicators raise vulnerability of external economy?
8. Which risk indicators reduce vulnerability of external economy?

After identifying the risk-increasing and risk-mitigating indicators, describe the 10-year trend for each indicator. Is it going up, down, rather stable, or is it hard to see a trend? How do the values for each indicator compare with those of other countries in the same period?

Then analyze the transmission mechanisms of which each indicator forms a part. Which other indicators influence the values of each indicator? And which other indicators are influenced by each indicator?

After answering these questions, say something about the impact of the indicator on the internal and/or external economy.

Concluding section

Try to formulate your conclusions with this three-step process:

1. Which risk-increasing indicators have you identified?
a. How does each indicator on its own or jointly with some other indicators affect the growth potential and/or vulnerability of the internal economy (e.g. size of national economy)?
b. How does each indicator on its own or jointly with some other indicators affect the growth potential and/or vulnerability of the external economy (e.g. foreign-exchange reserves)?

2. Which risk-mitigating indicators have you identified?
a. How does each indicator on its own or jointly with some other indicators affect the growth potential and/or vulnerability of the internal economy (e.g. size of national economy)?
b. How does each indicator on its own or jointly with some other indicators affect the growth potential and/or vulnerability of the external economy (e.g. foreign-exchange reserves)?

3. What is the overall effect of the risk-increasing and risk-mitigating indicators on country risk? In other words, to what extent do the risk-mitigating factors compensate for the risk-increasing indicators? And what can you say about the risk of the country as compared to other countries?

Summary of this tutorial

Hopefully this online tutorial on country risk reports was helpful to you. Key thing is that work on country risk reports always starts with defining its objectives and setting its key parameters. Who is the target audience, what is the time horizon, and how is country risk defined?

If you have any questions, please let us know.

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