Country Risk Ratings Research Articles

Exploring Global Competitiveness Index 4.0 through the lens of country risk

The Global Competitiveness Index (GCI) 4.0 provides an annual evaluation of country-level productivity and development in the fourth industrial revolution era. The GCI 4.0 is classified into 12 pillars representing socioeconomic, financial, health, technological, and other factors of production. Country risk, which is an aggregate measure of country-level exposure to financial, political, and economic risks, can influence national development. This study explores the association between country risk and competitiveness by mapping country risk drivers to GCI and GCI pillars to country risk. Two Bayesian Belief Network models, with a minimum prediction accuracy of 81.3 %, are developed using two data-sets representing the GCI and country risk ratings of 107 countries. Sensitivity analysis reveals that low performance in information and communication technology (ICT) adoption (monetary policy) can significantly affect country risk (GCI), whereas innovation capability (financial system risk) and institutions (legal system) can considerably improve country risk (GCI). By delving into how the pillars of competitiveness interact with various risk factors such as political stability, economic volatility, and regulatory environment, decision-makers, investors, and policymakers can gain valuable insights that guide effective resource allocation, risk mitigation strategies, informed policy formulation, and sustainable development efforts.

The Asymmetric Effect of Political Risk and Exchange Rate Fluctuations on Foreign Direct Investment Inflows in South Africa

Most developing countries rely heavily on foreign direct investment (FDI) inflows for economic growth and stability. However, political risk and the foreign exchange rate could direly affect FDI inflows as investors seek stable markets. The most recent example of political risk interactions, the exchange rate and FDI has been the trade war between the United States (US) and China, where the US increased tariffs on Chinese goods worth over $16 billion. A crucial debate is needed regarding the importance of FDI inflows in developing countries, such as South Africa. FDI is observed as a crucial component in providing resources, and it is critical in facilitating globalisation and providing financial assistance to countries in need, especially developing countries such as South Africa. This study aimed to examine the long- and short-run effects of political risk ratings and foreign exchange rate fluctuations on FDI inflows in South Africa. The literature review provided evidence of long- and short-term relationships between political risk ratings, the real effective exchange rate, and the GDP's balancing variable on the dependent FDI inflows. The study utilised both the autoregressive distributed lag (ARDL) and non-linear autoregressive distributed lag (NARDL) models to analyse quarterly data from 1995 to 2020. The Variables included in the study were political risk, the real effective exchange rate, FDI inflows and GDP. The study revealed that political risk ratings and the real effective exchange rate have long-run effects on FDI inflows. The real effective exchange rate has an asymmetric long-run effect. It was also found that FDI inflows respond more to real effective exchange depreciations than real effective exchange rate appreciations, implying that the exchange rate is an important economic factor in explaining the investment inflows. Consequently, the study recommends that policymakers deploy responsive policy measures to deal with currency fluctuations and political instability. In South Africa, the negative effect of political risk affects FDI and impacts the overall country risk ratings and the country's ability to borrow. The study also recommends that further research be employed to understand other impacts on FDI inflows and the interaction of political risk and the real effective exchange rate on other critical economic factors.

Building bridges: From the probability of a country crisis to a country risk assessment

Country risk is often misconceived, leading to misunderstanding and, consequently, misapplication. This paper aims to provide an alternative way to assess country risk, based on quantitative tools where the link between country crises, firms’ characteristics and country risk ratings are presented. This paper reviews the literature on country risk concepts and develops a theory for the impact of country risk on the real economy, in particular how the outcome, provoked by a country crisis, effects firms’ assets. A statistical model based on the probability of a crisis adjusted to firm idiosyncratic exposure to country risk is built with respect to the type of exposed asset. The proposed assumptions that country risk alone does not exist, and that country risk must be combined with the primary source of risk to be measured, are rooted in natural science concepts about vulnerability and hazard and are the essence of this paper. The model is forward looking based on the probabilities of the occurrence of countries’ crises, providing an economic foundation for the additional cost of capital that country risk represents. This methodology could provide additional help to investors and banks.

АСИМЕТРІЇ ОПОДАТКУВАННЯ ДІЯЛЬНОСТІ ТНК В УМОВАХ НЕРІВНОМІРНОСТІ ЕКОНОМІЧНОГО РОЗВИТКУ

Анотація. Нерівномірність економічного розвитку значно динамінізує векторну спрямованість і рельєфно проявляє характер економічних протиріч, що набувають свого концентрованого варіанта в асиметричності оподаткування діяльності ТНК. Дослідження доводять взаємозв’язок між ставками податку на прибуток підприємств і рейтингом ризику країн. Установлено, що для європейських країн переважає негативний взаємозв’язок (позитивний нахил) між ставкою податку на прибуток підприємств і рівнем ризику для країни. Результати дослідження підтверджують гіпотезу, про те, що більший ризик у країни, то вищу ставку податку на прибуток підприємств установлює уряд. За допомогою економетричних методів проаналізовано вплив податкового зако­нодавства країн на діяльність ТНК і виявлено, що в менш розвинених країнах податкова система меншою мірою стимулює підприємницьку діяльність ТНК. Водночас великий потенціал для поліпшення податкової політики мають як менш розвинені країни (В’єтнам), так і високорозвинені (Японія і Німеччина). Доведено, що в розвинених країнах найбільший прямо пропорційний вплив на показних обсягу товарообігу ТНК здійснюють такі показники, як рівень податкового навантаження у відношенні до ВВП, ставка корпоративного податку, ставка відрахування підприємств на соціальне забезпечення. Обернено пропорційний вплив здійснює ставка непрямих податків. Найбільш істотними податковими чинниками, що визначають динаміку прибутку відповідних ТНК, є рівень податкового навантаження у відношенні до ВВП. Ключові слова: податкове навантаження, оподаткування ТНК, податкове регулю­вання, податок на прибуток. Формул: 0; рис.: 4; табл.: 2; бібл.: 17.

Remittances and disaggregated country risk ratings in Tunisia: an ARDL approach

ABSTRACT Tunisia is currently facing political, economic and financial problems which have an impact on the flow of remittances. This study is the first attempt to give a thorough analysis of a two-way relationship between workers’ remittances and ICRG disaggregated country risk ratings (such as economic, financial and political risks) in Tunisia in short and long run, spanning the period 1984–2016. In an attempt to achieve this key objective, an ARDL approach combined with CUSUM and CUSUMSQ tests, and Wald test are adopted to investigate this linkage. The results show the presence of a long-run relationship. In addition, it could be deduced that in the long-run, economic risks have a negative impact on remittances, whereas in the short-run, they have a positive impact. The financial risk increases remittances because it includes variables related to remittances such as exchange rate stability. A higher level of remittances carries a higher level of financial risk in the short and long-runs. These results engage policy-makers to minimize this negative effect and channel remittances towards investment purposes. Results also indicate that, in response to an increase in remittances, the political risk decreases in the short run but increases in the long run.

Do Country Risks Matter for Tourism Development? International Evidence

This research fills the gap in the tourism literature on the impacts of country stability—including political, financial, and economic—on tourism development (i.e., international tourist arrivals, international tourism revenues, and travel and leisure sector returns). To account for possible asymmetric and nonlinear relationships among variables, we apply a new method of moment quantile regression, by using panel data from 106 countries spanning the period 2006–2017. From a global perspective, the empirical results indicate that higher country stability generally leads to higher tourism development, while there is no salient influence of financial stability on travel and leisure sector returns. This suggests that the effects of country risk ratings are mostly nonlinear across different tourism development quantiles. Additionally, different components of risk rating scores have diverse impacts on tourism development. The findings mean that policy makers should consider their tourism condition when setting country stability strategies.

Ecological footprint, tourism development, and country risk: International evidence

This research empirically explores the economic-, tourism-, and country risk ratings-induced Environmental Kuznets Curve (EKC) hypothesis by employing ecological footprints (EFs) as indicators of international environmental degradation. To account for distributional heterogeneities across countries as well as possible asymmetric relationships among variables, we apply a quantile regression approach by using panel data from 123 countries spanning 1992–2016. Our findings partially support that income, tourism, and country risk EKCs (i.e., inverted U-shape relation) exist in grazing land and forest land, signifying that these 2 types of land are sacrificed (increased) and then shift toward enhancing more environmental protection lifestyles as GDP, tourism revenues, and country risk ratings further rise. Conversely, U-shape relations generally exist in carbon-absorption land, cropland, and fishing ground, implying that growths of tourism, GDP, and country risk ratings have shifted from enhancing more environmentally protective policies to encouraging EF-consuming lifestyles for these EF components. In addition, we uncover that income development is largely responsible for increases in EF, while tourism generally and salient decreases forest land and grazing land. We also confirm the income EKC hypothesis in European countries. Tourism increases (reduces) fishing ground at lower (higher) fishing quantiles, suggesting the asymmetric impacts of tourism across different quantiles. The political risk rating shows a mostly positive impact on EF than those of economic and financial risk ratings, denoting the important impact of a country’s political rating on environment degradation. Overall, the findings herein advocate the need for analysis that considers heterogeneities across countries, different EF quantiles, and different EF components in the tourism-, economic-, and country risk-induced EKC estimations.

Deficits and crowding out through private loan spreads

Post crisis, bank loan spreads increased and have remained elevated despite central bank actions, low LIBOR rates and observed Treasury yields. Using large syndicated loan dataset, this paper estimates that a 1 percentage point to GDP increase in government deficits increases spreads by around 9 basis points on average. This is consistent with partial crowding out. Weaker country risk ratings, larger loan size also increase spreads. Finally, the paper provides evidence that US deficit spending results in a crowding out of around one-half in loan markets and have some crowding out of loans in other markets.

A critique on the Corruption Perceptions Index: An interdisciplinary approach

The purpose of this study is to test the assumptions of the Corruption Perceptions Index (CPI) and examine the causal relationships among its data sources for improvement priorities. In doing so, we use a novel interdisciplinary methodology including cluster analysis, classification analysis, partial least squares structural equation modeling and importance-performance map analysis. Our methodology enables policymakers to identify the critical data sources that a given country should focus on in order to improve its position in the CPI ranking relative to other countries. Based on corruption perceptions of 176 countries in the 2016 CPI, our results provide evidence against the CPI's assumptions, as individual data sources have unequal effects on the CPI and exhibit the causal interrelations among one another. Corruption perceptions are not homogeneous across countries, with developed countries showing lower levels of perceived corruption than emerging countries. The presence of synergistic effects among the CPI's data sources suggests that national policymakers consider multiple data sources of the CPI for decision-making process rather than simply focus on any single one of these data sources or their equally-weighted aggregation. Moreover, policymakers should allocate the country's resources – which are often limited – with the first priority to improving the data source score of the Economist Intelligence Unit Country Risk Ratings, the critical driver of the CPI. Interestingly, the modified CPI which removes insignificant data sources outperforms the non-modified CPI in terms of the goodness-of-fit assessment, the unbiasedness and the association with the World Bank's Control of Corruption.

Does the International Tourism Industry Relax Sovereign Credit Ratings: The Case of Countries Most Reliant on Tourism

Abstract Sustainable tourism plays a dominant role in the economic well-being of some of the world’s countries, especially small ones. Tourism earnings account for a significant proportion of their GDP, and they have an overwhelming reliance on tourism as a source of service exports. The general trends in tourism earnings and volatilities in country risk ratings often go hand in hand, especially for small touristic countries in that region. The research presented in this paper provides a comparative assessment of the international country risk ratings and highlights the importance of their tourism earnings and tourism export. This study employs the ordered response and Poisson count panel data model for a sample of twenty-two countries most reliant on tourism, including Mediterranean countries. The aim of this study is to investigate whether the tourism determinants of sovereign credit ratings for those countries vary between different rating agencies (Standard & Poor’s, Moody’s and Fitch’s). The key finding is that an increase in tourism earnings as a proportion of GDP and as the main export share in the total country export impairs the sovereign risk rating and turns out to be robust across the different methodologies.

Country Risk Ratings and Stock Market Returns in Brazil, Russia, India, and China (BRICS) Countries: A Nonlinear Dynamic Approach

This study examines the linkages between Brazil, Russia, India, and China (BRICS) stock market returns, country risk ratings, and international factors via Non-linear Auto Regressive Distributed Lags models (NARDL) that allow for testing the asymmetric effects of changes in country risk ratings on stock market returns. We show that BRICS countries exhibit quite a degree of heterogeneity in the interaction of their stock market returns with country-specific political, financial, and economic risk ratings. Positive and negative rating changes in some BRICS countries are found to have significant implications for both local stock market returns, as well as commodity price dynamics. While the commodity market acts as a catalyst for these emerging stock markets in the long-run, we also observe that negative changes in the country risk ratings generally command a higher impact on stock returns, implying the greater impact of bad news on market dynamics. Our findings suggest that not all BRICS nations are the same in terms of how they react to ratings changes and how they interact with global market variables.

Sovereign default risk in OECD countries: Do global factors matter?

We study the determinants of sovereign default risk for a group of 23 OECD countries using quarterly data spanning the period between 2000:Q1 and 2016:Q3. Applying the recently developed panel dynamic heterogeneous common correlated effects estimator of Chudik and Pesaran (2015) our study innovates in considering potential endogeneity issues and cross-sectional dependence. We control for both global risk appetite and monetary policy stance, as well as country risk ratings. The results show that common factors are the main drivers of solvency risk for our set of countries. Specially relevant, we find that macroeconomic determinants are not significant predictors of long-term sovereign spreads.

Cultural and Institutional Antecedents of Country Risk

This study explores the effects of cultural and institutional factors on country risk. We use the 2004 Global Leadership and Organizational Behavior Effectiveness Research study’s estimations of nine cultural dimensions, as well as measures of democracy and gender empowerment, in a sample consisting of 55 countries. The results indicate that gender empowerment, humane orientation, and institutional collectivism have a larger impact on country risk than democracy, uncertainty avoidance, and gender egalitarianism. The interdependency of some cultural dimensions suggests that cultural and institutional differences could be used to predict mean country risk ratings.

Impact of the country risk index on the Colombian Stock Market

El objetivo de la investigación es evaluar los impactos que han generado las calificaciones de riesgo país emitidas por las tres principales empresas calificadoras de riesgo (ECR) a nivel internacional (Standar & Poors, Moody`s Investor y Fitch Ratings) en la volatilidad del mercado accionario colombiano, durante el periodo de estudio 2010 al 2016. Es así como por medio de herramientas contabilométricas y la métodologia de estudio de eventos y utilizando modelos matemáticos y estadísticos se calculó los retornos anormales acumulados (CAR) el cual se pudo evidenciar resultados de la no existencia de retornos anormales derivados de la emisión de calificación de riesgo país y por lo tanto no se presentaron impactos en el precio de las acciones. Este artículo cuenta con originalidad debido a que en Colombia no se han hecho investigaciones en el ámbito de la contabilometría y mucho menos evaluando en impacto del riesgo país en el mercado accionario, pero se contó con limitaciones, debido a que el enfoque contabilometríco es un nuevo tópico en el área contable principalmente en Colombia y su relación en la evaluación del Riesgo País.

Impact of macroeconomic factors and country risk ratings on GCC stock markets: evidence from a dynamic panel threshold model with regime switching

ABSTRACTThis study examines the non-linear relationship between stock markets in GCC countries and their country risk ratings as well as with major macroeconomic factors. Based on a dynamic panel threshold model with two and four regimes, the results provide evidence of short-term asymmetry between first-lagged GCC stock returns and the performance of GCC stock markets. In addition, only the financial risk (FR) rating has a significant positive effect on the performance of GCC stock markets according to the prevailing regimes for the GCC lagged returns and the Brent oil market. Among the macroeconomic factors, improvements in the global stock markets, the MSCI Global Islamic Index, and the oil price increased the performance of GCC stock markets, whereas increases in the gold price, the 3-month U.S. Treasury bill rate, and the U.S. Treasury bond rate reduced the performance of the GCC stock markets. These results have important implications for investors, policymakers, and portfolio managers.

Statistical properties of country risk ratings under oil price volatility: Evidence from selected oil-exporting countries

This paper focuses on the application of panel models for identification and analysis of influence of oil price volatility on statistical properties of country risk ratings which stem from uncertainty of macroeconomic fluctuations. Firstly, two statistical properties of country risk ratings, volatility clustering and asymmetrical revision were identified in a theoretical framework based on Cruces (2006). Secondly, considering the oil price volatility, numerical experiments were conducted based on extended models to test and verify specific properties of country risk ratings in selected oil-exporting countries. Empirical results suggest that properties of country risk remain comparatively steady despite oil price volatility. It is also found that the oil price volatility can obviously exaggerate the country risk volatility, as it happened during 2007–2009. Country clustering based on the properties of country risk ratings shows that the selected countries maintain a significant clustering tendency. These features are of great importance for estimating risk exposure of international trade and investments in oil export during extreme situations.

Asymmetric Linkages between BRICS Stock Returns and Country Risk Ratings: Evidence from Dynamic Panel Threshold Models

AbstractThis study investigates the asymmetric linkages between the five BRICS (Brazil, Russia, India, China and South Africa) countries’ stock markets and three country risk ratings (financial, economic and political risk) in the presence of major global economic and financial factors. Using the dynamic panel threshold models, we find evidence of asymmetry in most cases. However, the significance and the signs of the effects of these risk ratings on the BRICS market returns differ across the lower and upper regimes. Furthermore, improvements in the global stock, West Texas Intermediate (WTI) and gold markets enhance the BRICS stock market performance. Increases in implied volatility indices lead to drops in the BRICS markets.

A momentum threshold model of stock prices and country risk ratings: Evidence from BRICS countries

We develop a multivariate momentum threshold autoregression (MTAR) model that examines the relationship between stock markets for each of the five BRICS countries – Brazil, Russia, India, China and South Africa – and changes in their economic, financial and political country risk ratings in response to positive and negative shocks. The findings suggest that the long-run and short-run relationships between the stock market and the three risk ratings variables of each country respond asymmetrically to shocks for all of the five BRICS, but at different speeds and depending on the direction of the shock, underpinning the differences in profit opportunities among these countries. The adjustment is faster for the individual BRICS following a positive shock (than a negative shock), except for Russia. Despite their grouping, the stock markets of the five BRICS countries are dissimilar and can add to diversification benefits in portfolios.

Modelling the Riskiness in Country Risk Ratings

This book presents an econometric analysis of riskiness in country risk ratings. Country risk and its associated risk ratings for 120 countries covering eight geographic regions is analysed by using the univariate and multivariate volatility models.

Forecasting Latin America’s Country Risk Scores by Means of a Dynamic Diffusion Model

Over the last years, worldwide financial market instability has shaken confidence in global economies. Global financial crisis and changes in sovereign debts ratings have affected the Latin American financial markets and their economies. However, Latin American’s relative resilience to the more acute rise in risk seen in other regions like Europe during last years is offering investors new options for improving risk-return trade-offs. Therefore, forecasting the future of economic situation involves high levels of uncertainty. The Country Risk Score (CRS) represents a broadly used indicator to measure the current situation of a country regarding measures of economic, political, and financial risk in order to determine country risk ratings. In this contribution, we present a diffusion model to study the dynamics of the CRS in 18 Latin American countries which considers both the endogenous effect of each country policies and the contagion effect among them. The model predicts quite well the evolution of the CRS in the short term despite the economic and political instability. Furthermore, the model reproduces and forecasts a slight increasing trend, on average, in the CRS dynamics for almost all Latin American countries over the next months.