Country Risk Rating Research Articles

Does country risk rating explain shadow banking development? Insights from advanced and emerging market economies

This study fills a research gap by specifically investigating the effect of country risk rating (CR) on shadow banking (SB) development from a global perspective using a dynamic panel estimation approach covering the period 2010–2019. Furthermore, the study explores whether a country's characteristics impact this nexus by grouping countries into advanced and emerging market economies based on their development level. To the best of our knowledge, few empirical studies have been conducted looking into this relationship from this perspective, and these findings open a new debate in banking literature. The empirical results reveal that CR positively impacts SB in advanced, emerging, and global samples of countries, implying that lower vulnerability to risk factors causes SB expansion. In addition, the results highlight that traditional macroeconomic and institutional factors impact SB development, although the extent of the effect and statistical significance of the factors vary and depend on countries' development levels. Remarkably, the empirical results confirm the validity of the complementarity and regulatory arbitrage hypotheses and support the possible asymmetric implications of monetary policy on SB. The results are robust when alternative model specifications are used and have significant implications for policymakers and regulatory bodies.

Country Risk Effects and Government Domestic Debt Nexus in South Africa

Country risk rating is one of the factors that determine the stability of a given country’s economy and the government's access to both domestic and foreign loans. This paper aimed at assessing the relationship that exists between country risk rating and the South African government's access to domestic debts or loans. Monthly data from January 2008 to December 2019 was investigated using the ARDL bounds testing approach and the error correction model (ECM). The findings of this paper indicated that all country risk components (economic, financial and political) have a significant long-run effect on government domestic debt. While economic and financial risk scores have a positive effect on government debts, an inverse relationship was found between political risk and government debt. These results imply that in order to be independent of foreign debt which comes with terms and conditions; policymakers and the South African government leaders should strive to sustain the stability of the economy and the country’s financial conditions.

The impact of foreign direct investment on the economic development of emerging countries of the European Union

AbstractStarting from the premise that the impact of foreign direct investment (FDI) on the economies of the host countries is different from one economy to another, the aim is to evaluate the impact of a set of economic and social indicators on FDI and net income (% GDP–Gross Domestic Product) in emerging, ex‐socialist countries of the European Union. Using econometric models, we analysed the relationship between the evolution of the net FDI inflows and a number of statistical indicators. Our findings proved that there are similarities between the countries analysed, in terms of the evolution of net FDI inflows, with some differences being recorded for Hungary, where the evolution of net FDI inflows has major fluctuations. We found that the countries present both similarities and differences in terms of variables that affect FDI. The FDI net inflows (% GDP) are in seven, out of nine economies, positively influenced by GDP, as it follows: Bulgaria, Lithuania and Slovenia are FDI attractive by an increasing GDP rate, while Latvia, Poland and Romania react to a better GDP per capita. Hungary is the only one that is positively influenced by both GDP rate and GDP per capita. Moreover, a decreasing corruption perception index, country risk rating, income tax (% of commercial profit) and other taxes paid by companies (% commercial profit) can positively influence the inflows of FDIs in some of the analysed countries.

Research on Health Cooperation Features of the 'Belt and Road' Countries in the Perspective of Complexity Theory - A Qualitative and Quantitative Analysis

Background The Belt and Road Initiative (BRI) is a systematic program that promotes the establishment of the human community of shared destiny. However, the lack of an explicit understanding of the difference among the Belt and Road nations impedes the precise health cooperation. This study aims to analyze the factors influencing health cooperation and recognize these countries' characteristics. Methods According to the Complexity Theory and literature retrievals, major influential factors of international health cooperation were identified and are employed in the two-step clustering in SPSS 22.0 to organize these countries for the recognition of their features. Findings According to the Sustainable Development Goals (SDG) health index and Human Development Index (HDI) level, cooperation level and country risk rating, diplomatic association and numbers of health cooperation mechanisms, a total of 62 countries are classified into three categories: 16 have few health needs, weak cooperation foundation, and low cooperation risk; 22 possess high health needs, good cooperation relationship, yet high cooperation risk; the remaining 24 nations are featured with general health needs and cooperation relation, good cooperation foundation, and low cooperation risk. Interpretation The cooperative features can be identified by SDG Health Index, HDI Level, Cooperation Degree, Country Risk Rating, Diplomatic Relationship, and the number of established health mechanisms. According to their different health needs, cooperative foundation, cooperation risk, and bilateral relationship, health cooperation should be separately initiated. Funding: National Health Commission of the People's Republic of China, International Health Exchange and Cooperation Center. Declaration of Interest: We declare no competing interests.

The Impact of Country Risk Rating on the Returns and Volatility of East Asia Stock Markets

The Impact of Country Risk Rating on the Returns and Volatility of East Asia Stock Markets

Does Country Risk Promote the Informal Economy? A Cross-National Panel Data Estimation

This article investigates whether country risk plays an important role in determining the size of the informal economy. Using annualized panel data for a sample of 131 countries and regions covering 1999–2007, and controlling for a set of control variables, we find that country risk is a robust and significant determinant of the informal economy: a 1% increase in the country risk rating (decrease in the country risk) causes a 0.1% fall in the informal economy, and political risk has the largest effect, followed by economic risk. Moreover, the estimation results provide little evidence in support of an inverted-U relationship between urbanization and the share of the informal sector, which shed new light on the urbanization-the informal economy nexus.

Promotion and Relegation between Country Risk Classes as Maintained by Country Risk Rating Agencies1

Credit rating agency assessments of sovereign risk bear weak statistical association with the quality of country policies. This paper demonstrates that where endogenous responses by policy makers to credit rating outcomes, and the degree of responsiveness of credit rating agencies to policy changes are accounted for, strong associations between policy quality and ratings should be present. The paper verifies these associations on panel data for 60 countries over the 1980-2012 period. JEL Codes: G23, G24, G14.

Comparative Analysis and Implications of Developing Country Risk

The share of emerging markets and developing countries in the global economy is growing and the status of G20 in the international society is also being strengthened. Considering the trend, the economic and political rising of developing countries can be regarded as opportunities to replace developed markets whose growth potential is relatively declining. However, there are risk factors that developed markets do not have. Therefore, it is essential to measure and manage the risk in developing countries.This study selected economic, political, and social indicators to measure risks, referencing the cases of professional country risk rating agencies, and developed an analytical framework to enable comparisons among countries. Furthermore, this study derived comprehensive country risk ranking by putting the indicators of economic, political, and social risks together and analyzed the impact of weight change on risk rating.

Country Factors Associated With the Risk of Hospitalization and Aeromedical Evacuation Among Expatriate Workers

To assess country factors associated with the risk of requiring aeromedical evacuation and hospitalization among expatriate workers and their dependents. The 2009-2010 data including 5725 aeromedical evacuations and 17,828 hospitalizations, and 2009 data of hospitalizations and aeromedical evacuations among 94,651 at-risk expatriates, were analyzed to assess 2 country risk rating tools. Each tool utilized four risk categories and reflected level of development and medical capabilities. Country risk category was strongly associated with risk of evacuation and/or hospitalization for each risk rating tool (eg, 46-fold increase from lowest to highest country risk category). Country risk tools strongly associate hospitalization and aeromedical evacuation with country risk category, and thus can be important indicators of relative medical risk. Employers may use these results to implement targeted prevention programs to support expatriate workers and their families.

The Determinants of Foreign Direct Investment Inflows to Jordan (A Preliminary Analysis)

Foreign direct investment has become an increasingly important channel for developing countries to enhance their economic and financial systems. A significant part of economic and financial research is the view that a host country's risks affect investment inflows. The purpose of this paper is to identify the determinants of foreign direct investment inflows to Jordan. Model is formalised based on the theory of foreign direct investment and the missing gaps in the literature. This study covered a period from 1996 to 2009. Quarterly data for collective political, financial and economic, data obtained from risk rating agency annuals and foreign direct investment in Jordan acquired from the Jordanian Central Bank and the Jordan Securities Commission. The country risk rating model indicates that the economic risk political risk and GDP are statistically significant in influencing FDI inflows to Jordan.

Excess Returns on Net Foreign Assets: The Exorbitant Privilege From a Global Perspective

This paper studies net foreign assets and the differential returns between gross foreign assets and liabilities for a sample of 49 countries between 1981 and 2007. It shows that investment income is more important than capital gains in imparting a drift to net foreign assets over the long-run, whereas the latter dominate short-term dynamics. Excess returns on net foreign assets of the United States are indeed exorbitant from a global perspective, only occasionally matched by other countries and mainly accounted for by positive valuation effects. The role of the United States as levered investor did not contribute to its exorbitant privilege. The econometric panel analysis also fails to find a robust positive relationship between leverage and excess returns. Notably, instead, real exchange rate depreciations increase excess returns through capital gains, proportionally to the relative foreign currency exposure. Excess yields on investment income are positively associated with the country risk rating. JEL Classification: F30, F31, F36

Reverse-engineering country risk ratings: a combinatorial non-recursive model

The central objective of this paper is to develop a transparent, consistent, self-contained, and stable country risk rating model, closely approximating the country risk ratings provided by Standard and Poor’s (S&P). The model should be non-recursive, i.e., it should not rely on the previous years’ S&P ratings. The set of variables selected here includes not only economic-financial but also political variables. We propose a new model based on the novel combinatorial-logical technique of Logical Analysis of Data (which derives a new rating system only from the qualitative information representing pairwise comparisons of country riskiness). We also develop a method allowing to derive a rating system that has any desired level of granularity. The accuracy of the proposed model’s predictions, measured by its correlation coefficients with the S&P ratings, and confirmed by k-folding cross-validation, exceeds 95%. The stability of the constructed non-recursive model is shown in three ways: by the correlation of the predictions with those of other agencies (Moody’s and The Institutional Investor), by predicting 1999 ratings using the non-recursive model derived from the 1998 dataset applied to the 1999 data, and by successfully predicting the ratings of several previously non-rated countries. This study provides new insights on the importance of variables by supporting the necessity of including in the analysis, in addition to economic variables, also political variables (in particular “political stability”), and by identifying “financial depth and efficiency” as a new critical factor in assessing country risk.

Reverse-Engineering Country Risk Ratings: Combinatorial Non-Recursive Model

The central objective of this paper is to develop a transparent, consistent, self-contained, and stable country risk rating model, closely approximating the country risk ratings provided by Standard and Poor's (S&P). The models should be non-recursive, i.e., they should not rely on the previous years' S&P ratings. The selected set of variables includes not only economic-financial but also political variables. We propose a new model based on the novel combinatorial-logical technique of Logical Analysis of Data (which derives a new rating system only from the qualitative information representing pairwise comparisons of country riskiness). The accuracy of the proposed model's predictions, measured by its correlation coefficients with the S&P ratings, and confirmed by k-folding cross-validation, exceeds 95%. The stability of the constructed non-recursive model is shown in three ways: by the correlation of the predictions with those of other agencies (Moody's and The Institutional Investor), by predicting 1999 ratings using the non-recursive model derived from the 1998 dataset applied to the 1999 data, and by successfully predicting the ratings of several previously non-rated countries. This study provides new insights on the importance of variables by supporting the necessity of including in the analysis, in addition to economic variables, also political variables (in particular 'political stability'), and by identifying 'financial depth and efficiency' as a new critical factor in assessing country risk.

Foreign direct investment and economic growth: some evidence from across the world

This study is concerned with Foreign Direct Investment (FDI) and economic growth across the world for the period 1991?2001. This article produces fresh empirical evidence on the relation between FDI and economic growth obtained from single-equation and simultaneous-equation estimates for 140 countries using macroeconomic variables. The results indicate that a positive and statistically significant estimate of coefficient of FDI is obtained from single-equation ordinary least squares method for real per capita GDP regressions in all but one case. There exists a positive and statistically significant relation between the real per capita GDP and FDI in the case of many countries but correlation coefficient between exports-GDP ratio and percentage FDI is found to be insignificant. Country risk rating and the telecommunications variables are significant in all the relevant regressions and correlation estimates.

The Interplay between National and International Law - Its Economic Effects Drawing on Four New Indicators

This paper analyzes whether the interplay between national and international law has any discernible effects on economically relevant variables. The specific aspects dealt with include (i) the difficulty of delegating competence to international bodies in the first place, (ii) the difficulty of reversing delegation decisions, (iii) the way that international law is transformed into the domestic legal order, and (iv) the potential role of national courts in drawing upon international law. The paper asks whether institutional arrangements corresponding with these aspects have effects on a country's risk rating which is used as a proxy for credibility. Credibility affects investment and growth. It is hypothesized that the role attributed to international law in domestic legal orders can improve the credibility of nation-state governments. The paper presents a new database containing information on the respective institutional arrangements in 56 countries. The database can also be used to assess the long-lasting discussion of monism vs. dualism empirically. Both the difficulty-of-delegating and the role-of-national-courts indicators have fairly robust effects on credibility. Monist orders do, however, not confer any more credibility on governments than dualist ones.

What are the risks when investing in thin emerging equity markets: Evidence from the Arab world

This study attempts to identify the risks involved when investing in five emerging Arab capital markets. We first find that a constant beta is not a good proxy for risk in these thinly traded emerging markets. However, firms’ fundamentals and country risk rating factors prove significant in explaining the cross-sections of stock returns. The paper provides three important contributions to the literature on asset pricing in emerging capital markets: (i) we show how country risk ratings can be aggregated into a country risk factor; (ii) we add to a growing literature suggesting that, in markets other than the US, it is possible to find large and growth stocks to be riskier than small and value stocks; (iii) we determine that despite economic, financial and political reforms, issues related to financial transparency and political instability are still powerful obstacles to investments in these nascent emerging markets.

Competitiveness of nations: A knowledge discovery examination

This paper presents the insights gained from the use of data mining and multivariate statistical techniques to identify important factors associated with a country's competitiveness and the development of knowledge discovery in databases (KDD) models to predict it. In addition to stepwise regression and weighted non-linear programming techniques, intelligent learning techniques (artificial neural networks), and inferential techniques (classification and regression trees), were applied to a dataset of 43 countries from the World Competitiveness Yearbook (WCY). The dataset included 55 variables on economic, internationalization, governmental, financial, infrastructure, management, science and technology, as well as demographic and cultural characteristics. Exploratory data analysis and parameter calibration of the intelligent method architectures preceded the development and evaluation of reasonably accurate models (mean absolute error <5.5%), and subsequent out-of-sample validations. The strengths and weaknesses of each of the KDD techniques were assessed, along with their relative performance and the primary input variables influencing a country's competitiveness. Our analysis reveals that the primary drivers of competitiveness are lower country risk rating and higher computer usage, in entrepreneurial urbanized societies with less male dominance and basic infrastructure, with higher gross domestic investment, savings and private consumption, more imports of goods and services than exports, increased purchase power parity GDP, larger and more productive but not less expensive labor force, and higher R&D expenditures. Without diminishing the role and importance of WCY reports, our approach can be useful to estimate the competitiveness of many countries not included in WCY, while our findings may benefit policy makers and international agencies to expand their own abilities, insights and establish priorities for improving country competitiveness.

Comparative analysis of risk ratings for the East European region

Following the aftermath of the 11 September 2001 events, the risks associated with engaging in international dealings have increased substantially, and become more difficult to analyse and predict for decision makers in the economic, financial and political sectors. The importance of country risk analysis is underscored by the existence of several prominent country risk rating agencies, which combine a wide range of qualitative and quantitative information regarding alternative measures of economic, financial and political risk into associated composite risk ratings. However, the accuracy of any rating agency with regard to any or all of these measures is open to question. For this reason, the paper provides a qualitative comparison of country risk rating systems used by seven leading rating agencies. The paper also provides a novel analysis of four risk ratings using univariate and multivariate volatility models for nine East European countries. These ratings are compiled by the International Country Risk Guide, which is the only risk rating agency to provide consistent monthly data for a large number of countries since 1984. The empirical results enable a comparative assessment of the conditional means and volatilities associated with county risk returns, defined as the rate of change in country risk ratings, across the nine East European countries. Moreover, the estimated constant conditional correlation coefficients provide useful information as to whether the countries are similar in terms of shocks to the four risk returns.

AUSTRALIA—SOVEREIGN RISK AND THE PETROLEUM INDUSTRY

Australia has rejoiced in its reputation for having low sovereign risk and corresponding rating, for decades. This reputation was bruised in the first decade after the High Court introduced Native Title into Australian law by the legislative response of the then Government, but has since recovered, and enjoys the world’s lowest country risk rating, and shares the worlds best sovereign risk rating with the USA. A number of government precipitated occurrences in recent times, however, raise the question: for how long can this continue?This paper tracks the long history of occasional broken resource commitments—for both petroleum and mining interests—by governments at both State and Federal level, and the policies which have driven these breaches. It also discusses the notorious recent cancellation of a resource lease by the Queensland Government, first by purporting to cancel the bauxite lease and, after legal action had commenced, by a special Act of Parliament to repeal a State Agreement Act. This has raised concerns in boardrooms around the world of the security of assets held in Australia on a retention, or care and maintenance basis.The paper also looks at the cancellation of the offshore prospecting rights held by WMC, with no compensation. This was a result of the concept that rights extinguished by the Commonwealth, with no gain to the Commonwealth or any other party do not constitute an acquisition of property, thereby denying access to the constitutional guarantee of ’just terms’ supposedly enshrined in the Australian Constitution where an acquisition has occurred.Some other examples are the prohibition on exploration in Queensland national parks last November. This cost some companies with existing tenures a lot of money as exploration permits were granted, but then permission to do seismic exploration refused (Victoria). Several losses of rights occurred as a result of the new Queensland Petroleum and Other Acts Amendment Act after investments have been made.Changes in fiscal policy can also impact on project viability, and some instances of this are considered.This paper also explores ways these risks can be minimised, and how and when compensation might be recovered.

Comparison of country risk models: hybrid neural networks, logit models, discriminant analysis and cluster techniques

Abstract This paper looks at the ability of a relatively new technique, hybrid ANN's, to predict country risk rating. These models are compared with traditional statistical techniques and conventional ANN models. The performance of hierarchical cluster analysis and another type of ANN, the self-organizing map were also investigated, as possible methods for making country risk analysis with visual effects. The results indicate that hybrid neural networks outperform all other models. This suggests that for researchers, policymakers and others interested in early warning systems, hybrid network may be a useful tool for country risk analysis.