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Starter questions to begin -- just begin -- to understand country risk

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Continuing from part 3, Brief introduction to China risks:

Here is a starter list of questions for the novice to begin -- just begin -- to understand the risk in your country of interest. Or you can charge in with your risk unmeasured and unpriced. Many do.

1. Judiciary

  • Is there an independent judiciary?
  • Is there a mechanism for independent arbitration?
  • Is the country subject to bilateral treaty with the US?

The PRC does not have an independent judiciary.

2. Intrastate conflict between state, province and enterprise zones

  • Which country to the casual observer seems more risky?

You can never, ever judge this from afar. Yes, there is enormous interference from Beijing and enterprise zones, but substitute the relevant government agency, and this pertains to almost any almost-developed nation; even democracies like India, Argentina, Brazil, and Australia that to the uninformed may appear benign or less risky.

One must be specific about the risk spectrum that one expects to find in a particular country, e.g., the UK has generally been by far the riskiest for US infrastructure investors but in terms of getting your people killed, Colombia is a leader if you don't pay your tuition up front to friendly support elements in order to learn how to play by local rules.

3. Corruption

  • How endemic is corruption?

There are corruption indices available, one of the best known is Transparency International's Corruption Perceptions Index, but they are very general and relative, not absolute. TI's 2003 Corruption Perceptions Index measures perceptions of the degree of corruption ranging from 10 (highly clean) and 0 (highly corrupt). Of 133 countries rated in 2003, the cleanest was Finland (1) and the worst was Bangladesh (133). It should be noted that "seven out of ten countries score less than 5 out of a clean score of 10, while five out of ten developing countries score less than 3 out of 10."

4. Valid independent country data

  • Is there valid independent in-country data?

There is no valid data of any kind in China, be it GDP, imports, or exports. China is by no means alone in this area. You must assume that any country, with the possible exception of the EU, manipulates its data. What is available is more useful for macro data trading.

5. Foreign exchange repatriation

  • What is the level of foreign currency translation and/or liquidity?

6. Export logistics

  • What is the level of export logistic risk?

Logistics risk is very dependent upon on-the-spot conditions, specifically graft.

For those unfamiliar with the problem, your product arrives dockside where a local inspector defers clearance until either the proper payoff is made or the product is declared rotted by same inspector and denied entry (or exit). I can remember jet engine spares and other high value components moved out of sheds and into the weather in SE Asia to force the hand of those unwilling to pay the going baksheesh.

7. Diplomatic leverage

  • Do we have a strong embassy presence? If not, any strong embassy?
  • Is the country militarily, internal security dependent on the US?
  • Is the country economically dependent upon the US?

8. Political risk insurance

  • Is political risk insurance available? If yes, on what terms?

It is said that political risk insurance firms quite literally live or die by their risk assessments which, in combination with their independence, is said to make them a good barometer of the target country.

9. Physical security

  • What is the level of overt or covert, internal or external threats to personnel, plants, raw materials, finished goods, and transport?

Gordon Housworth



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