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Rank in
January 2011
Country
Composite
Risk Rating
January 2011
Composite
Risk Rating
February 2012
January 2011
versus
February 2010
Rank in
February 2010
Very low risk
1
Norway
90.5
90.00
0.50
1
11
Germany
83.5
83.50
0.00
5
13
Canada
82.8
82.75
0.00
6
16
Qatar
82.0
81.25
0.75
11
19
Japan
81.0
80.00
1.00
17
Low risk
31
United Kingdom
77.3
73.75
3.50
39
32
United States
77.0
77.25
2 0.25
26
39
China, People’s Rep.
75.0
76.25
2 1.25
30
44
Brazil
74.5
72.75
1.75
46
68
Spain
70.0
71.00
2 1.00
58
Moderate risk
78
Indonesia
68.5
67.25
1.25
81
86
India
67.3
70.50
2 3.25
62
104
Egypt
64.5
66.50
2 2.00
84
111
Turkey
63.3
63.50
2 0.25
100
High risk
124
Venezuela
59.5
53.75
5.75
133
127
Iraq
58.5
59.25
2 0.75
119
129
Pakistan
57.3
57.00
0.25
125
Very high risk
138
Haiti
48.5
49.75
2 1.25
137
140
Somalia
41.5
36.75
4.75
140
Table 25.4
Composite risk ratings for January 2011 versus February 2010
Source: International Country Risk Guide, January 2011, Table 1, The PRS Group, Inc. Used with permission.
3
You can find more information on the Web site: www.prsgroup.com . We are grateful to the PRS Group for
supplying us data and guidance.
Consider two investors: an American wishing to invest in Indonesian stocks and an
Indonesian wishing to invest in U.S. stocks. While each would have to consider macro-
economic analysis of the foreign country, the task would be much more difficult for the
American investor. The reason is not that investment in Indonesia is necessarily riskier
than investment in the U.S. You can easily find many U.S. stocks that are, in the final
analysis, riskier than a number of Indonesian stocks. The difference lies in the fact that
U.S. financial markets are more transparent than those of Indonesia.
In the past, when international investing was novel, the added risk was referred to as
political risk and its assessment was an art. As cross-border investment has increased and
more resources have been utilized, the quality of related analysis has improved. A lead-
ing organization in the field (which is quite competitive) is the PRS Group (Political Risk
Services) and the presentation here follows the PRS methodology.
3
PRS’s country risk analysis results in a country composite risk rating on a scale of 0
(most risky) to 100 (least risky). Countries are then ranked by the composite risk measure
and divided into five categories: very low risk (100–80), low risk (79.9–70), moderate risk
(69.9–60), high risk (59.9–50), and very high risk (less than 50). To illustrate, Table 25.4
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C H A P T E R
2 5
International
Diversification
893
Political Risk Variables
Financial Risk Variables
Economic Risk Variables
Government stability
Foreign debt (% of GDP)
GDP per capita
Socioeconomic conditions
Foreign debt service (% of GDP)
Real annual GDP growth
Investment profile
Current account (% of exports)
Annual inflation rate
Internal conflicts
Net liquidity in months of imports
Budget balance (% of GDP)
External conflicts
Exchange rate stability
Current account balance (% GDP)
Corruption
Military in politics
Religious tensions
Law and order
Ethnic tensions
Democratic accountability
Bureaucracy quality
Table 25.5
Variables used in PRS’s political risk score
shows the placement of countries in the January 2011 issue of the PRS International
Country Risk Guide. It is not surprising to find Norway at the top of the very-low-risk
list, and small emerging markets at the bottom, with Somalia (ranked 140) closing the list.
What may be surprising is the fairly mediocre ranking of the U.S. (ranked 32), comparable
to Libya (20) and Bahrain (29), all three in the low-risk category.
The composite risk rating is a weighted average of three measures: political risk, finan-
cial risk, and economic risk. Political risk is measured on a scale of 100–0, while financial
risk and economic risk are measured on a scale of 50–0. The three measures are added and
divided by 2 to obtain the composite rating. The variables used by PRS to determine the
composite risk rating from the three measures are shown in Table 25.5 .
Table 25.6 shows the three risk measures for seven of the countries in Table 25.4 , in
order of the January 2011 ranking of the composite risk ratings. The table shows that
by political risk, the United States ranked third among these seven countries. But in the
financial risk measure, the U.S. ranked sixth among the seven. The surprisingly poor
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