IAS-36...Country Risk ..???(any idea)

[geo]

In IAS-36 the term COUNTRY RISK has been used anyone have any idea what is meant by it?

[CBPian]

Dear Friend

Country risk is what they call soverign risk. This is composed of a lot of factors-
e.g. international financial rating of the country(check S&P website), political situation, economic situation, market freedom including freedom to invest and disinvest, fund repatriation policies and business confidence etc etc.

[smraza]

No CBpian, its not like that, both are little bit different,

Country risk is caused by politicl (unwilingness to repay) or economic (inability to repay) events in a particular country.
country risk relates to the likilihood that changes in the business enviroment will occur that reduce the profitability of doing business in a country. These changes can adversly affect operating profits as well as the value of assets.

Sometimes Sovereign Risk gets confused with Country Risk. Sovereign risk is the risk of the government or government related entity making payment. Country risk embodies both govern (sovereign) and commercial (corporation/banks etc) risk.

Often countries have external ratings assigned by Rating Agencies. However, those ratings can vary depending on the service provided by the rating agency. Some countries simply ask for a foreign currency bond rating, which only covers the bond issues.

It is important to recognise what country risk is trying to define. It can capture, say legal, tax, accounting etc, which are typically referred to as Operational risk. But the key is the payment risk, ie the flow of funds availability from one country to another. If a business is exporting goods to say Indonesia, there are two payment risks

The counterparty – ie importer and bank; and
The country risk – ability of that counterparty to obtain foreign currency to make payment.

Regards
S M R


Edited by - smraza on Aug 06 2003 125551 AM

[CBPian]

OK, I stand corrected.<img src=icon_smile_approve.gif border=0 align=middle>

[Pervez]

Hi Raza!
I think u started off correctly, but the ramblings got better of u.
Just to remind us all in what context we r talking of country risk.
IAS 36 under the heading <b>DISCOUNT RATE</b> states that if a market determined, asset-specific rate is not availabe for determining the value of asset or portfolio of assets than we can construct a discount rate taking into account <b>country risk, currency risk, price risk, and cash flow risk</b>
So if the Indonesian party cann't get foreign exchange [that will only happen if Indonesia is nuked by some super power] that is a currency risk because than your exporter will have to accept Indonesian rupee and do whatever it likes with it [although this example is a theoritical non-sense].
It is true that Country Risk is different from Sovereign Risk, but it is not true that Country Risk embodies Sovereign Risk. Sovereign risk is the risk that govt or its agencies will default on their loans payment, whereas country risk is risk generated by the political and economic policies of the govt. So if a govt. is debt free it can still generate country risk by unwise policies.
Hope i made myself clear. Can u guys quote any references. I am looking at a research paper prepared by S&P"Behind The RatingsSovereign Credit RatingsA Primer"
Take care!





Edited by - Pervez on Aug 08 2003 043634 AM

Edited by - Pervez on Aug 08 2003 044608 AM

Edited by - Pervez on Aug 08 2003 044806 AM