SKEMA BUSINESS SCHOOL
What is Risk all about?
RULES
ØTwo grades Presentation and Report
ØTeams of 4 members
ØEach team has to realize a country-risk analysis of a country
ØPresentation of 15min per group in the last two sessions
ØPresentation order will be random
ØSend a report of maximum 5 pages
ØAll information sources are allowed (ChatGPT!)
ØThe report and the PowerPoint should include:
Ø A brief presentation of the country
Ø and a comparative Country Risk Analysis
COURSE OUTLINE (5 SESSIONS)
ØIntroduction to risk and country risk analysis
ØInformation Sources
ØAnalysis of the Balance of Payments
ØAnalysis of the External Debt
ØExternal Debt Restructuring
ØPolitical Risk Analysis
WHAT IS RISK?
Michel H. Bouchet (c) 2018
IMPORTANCE OF INFORMATION
▶Risk stems from all the uncertainty regarding current or
future situations, where information about the situation’s
outcome is insufficient, lacking or simply wrong
• Information availability = measure of risk (BOP, debt data,
governance, corruption…)
• Information scarcity = taking action might produce negative and
costly consequences (investigation time, transaction cost, delays…)
RISK CAN BE GOOD
▶Risk stems from all the negative consequences of the unknown
▶“Risk means more things can happen than will happen.” Elroy Dimson
▶“Risk” derives from the early Italian risicare = “to dare” : risk is a
choice rather than a fate.
Peter L. Bernstein- Against the Gods: The Remarkable Story of Risk
Risk is always the byproduct of Uncertainty!
RISK VS UNCERTAINTY
▶Frank Knight: 1921 Risk stems ▶Harry Markowitz:
from outcomes that are unknown 1959: Risk = probability of loss
but can be tackled with probability = historical volatility in returns
distribution…. Uncertainty stems as measured by standard
from a deficit of information, hence deviation or Beta. But risk
randomness of results diversification and tolerance
also matter!
▶J M. Keynes: (Treatise on ▶ Ulrich Beck: 2010: « Global risk
Probability 1921): Non-linear nature society where current
of risks and danger of expecting decisions and technological
the future as simple projection of developments trigger long-
the past: Role of animal spirits in term global impact »
volatility spill-over and herd (warming, terrorism, pollution,
financial deregulation…)
behavior.
Michel H. Bouchet (c) 2018
HISTORY OF RISK MANAGEMENT
« Ancient times » = circular time of life and nature
(until the Middle Age)
XV° century Renaissance = « Modern time » = Merchant time
linear time of economic & financial transactions!
Michel H. Bouchet (c) 2018
THE « DISCOVERY » OF RISK
Pascal 1654 Fermat 1654 Leibniz 1703
Markowitz 1959 M. Scholes 1990 B. Mandelbrot 1990
Michel H. Bouchet (c) 2018
NICOLAS DE CONDORCET: 1765: PROBABILITY DISTRIBUTION AND
STATISTICS
Robert Brown: Scottish botanist: in 1827, while examining
grains of pollen suspended in water under a microscope, Brown
observed minute particles ejected from the pollen grains,
executing a continuous jittery motion
Jules Regnault (1863): « Le calcul des chances » : random
walk model of stock price variations (good/bad speculation)
Louis Bachelier (1900): stock price forecasting is
impossible due to endless number of influences though it is
possible to study probability distribution of price variations
(sigma) = volatility risk
Alfred Cowles (1933): forecasting stock market prices is
impossible (large gap between actual stock prices and
professional forecasting)
Michel H. Bouchet (c) 2018
MEASURING RISK
STEPS TO MANAGE RISK
1. Risk identification
2. Probability of occurrences
3. The timing of the risk
4. The likely impact
CONCLUSION
▶Transforming information into economic
intelligence =
Best risk mitigation strategy!
SKEM A BUSIN ESS SCHOOL
What is Country Risk all about?
Michel Henry Bouchet
UNDERSTANDING COUNTRY RISK
▶Traditional definition of cross-border financial risk:
Assessment of a foreign entity’s ability and willingness
to meet its external obligations
in full and on time
▶Foreign entity? Private firm, country government, bank, supplier,
client, partner..
▶Country risk is composed of a complex combination of
political, financial and macro-economic risk
COUNTRY RISK IS EVERYWHERE
ØCountry risk is not a monopoly of foreign creditors, exporters, importers,
or investors
ØDomestic residents (households, investors, corporate sector) also face
country risk from their own country’s socio-economic and political
situation: The country’s goverment can take arbitrary decisions that will
affect the residents’ wellbeing
Ø The country can be contaminated by negative regional or global forces
• A deterioration in the risk perception by capital markets and rating agencies will
feedback on domestic residents’ environment: downgrading + capital flight!
MAPPING COUNTRY RISK
EUROMONEY 2017
5
Michel H. Bouchet/SKEMA (c) 2018
STUDYING COUNTRY RISK
COUNTRY + RISK
▶Country = sovereign entity, culture and values,
geographical distance, national laws and
regulations, socio-political parameters
▶Risk = lack of perfect information in real time,
spill-over effect, abrupt changes
INTERPLAY OF COUNTRY RISK WITH
THE GLOBAL ECONOM Y
Capital flows
Exchange rates
Interest rates
IFIs
Global trade
Market access Macroeconomic
Financial
Rating agencies Socio-political
Global GDP
Global terrorism
Michel H. Bouchet/SKEMA (c) 2018 7
Comparing Countries
Low
Risk
Tunisia
High
Risk
PREDICTING THE FUTURE IS HARD
Michel H. Bouchet/SKEMA (c) 2018 9
World Bank, PWCs, Credit Suisse
Inflation, twin deficits, weak
Capital controls, debt default,
banking insolvency
productivity, rising labor costs,
Sovereign Macro- stock market bubble
&Transfer Economic
Risk Risk Exchange rate imbalances,
deteriorating competitiveness,
Political imported inflation
Bad governance and Exchange
corruption, political turmoil,
Risk COUNTRY rate Risk
strikes, nationalization, RISK
revolution
Correlation Socio-
and Cultural
Systemic Xenophobia, cultural and
Risk
Risk Legal and religious intolerance
Spill-over, commodity price Regulatory
volatility, regional recession, Risk Contract repudiation,
rating downgrading,
confiscation, opacity,
competitive devaluations Michel H. Bouchet/SKEMA (c) 2018 10
bureaucracy
MEASURING RISK
ØEconomic risk Quantifiable
ØFinancial and transfer risk but ultimately
judgmental
ØExchange risk
ØCommodity risk
ØPolitical risk
ØCultural environment risk
Subjective,
ØOperational risk insurable and
diversifiable
ØLegal and contractual risk
(repudiation, confiscation, bribes...)
ØRegional contamination risk
(spill-over effect)
ØSystemic risk (global crisis)
Payment delays, capital controls,
customs bribes, exchange rate Payment arrears, rescheduling,
refinancing, default and write-off
devaluation
Exporter Creditor
Defective supplies, exchange rate Capital controls, contract
over-valuation, corrupt customs repudiation, bureaucracy,
officers corruption, deficient
infrastructures
Importer COUNTRY FDI
RISK
EXPOSURE
Investment
M&As Devaluation, strikes, bad
fund governance, weak productivity,
nationalization
Drop in commodity prices, Domestic
regional recession, competitive economic
devaluations, debt default, stock agents
Inflation, banking crisis, negative
market crisis interest rates, protectionism,
Michel H. Bouchet/SKEMA (c) 2018 12
political turmoil
CONCLUSION
▶Reliable and updated information
▶= Economic intelligence
▶▶ Robust risk analysis