Comparative Analysis and Implications of Developing Country Risk

Jin Young Moon, Yun Ok Kim, and Minyoung Lee

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 growth of developing countries can be regarded not only as opportunities to replace domestic and developed markets, whose growth potential is declining relatively, but also as risks. Therefore, measuring and managing the risk of developing countries is essential.

Given this background, 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 merging the economic, political, and social risk indicators together, and also analyzed the impact of weight change on the risk rating.

Regarding the more specific results of this study, economic risk of Iran, Ukraine, Kyrgyzstan, Congo, and Tanzania appears to be generally high, and that of China and some Middle East oil-producing countries, such as Qatar and Saudi Arabia, appears to be relatively low. In terms of political and social risk, member states of the European Union generally show low risks, but Afghanistan, the Congo, Zimbabwe, Myanmar, and Pakistan are recognized as higher political risk countries. Comparing the economic risk with political and social risk, the number of countries that are within economic risk score of five, the average score for this study, is relatively high. On the other hand, political and social risk appears to have greater variation by country, which means political and social conditions in each country have greater uncertainty.

In addition, this study examined the impacts of weight changes in each risk indicator sector. If weight in political and social risk is increases, then the number of countries with high-risk (whose score is higher than 8) and low-risk (whose score is lower than 3) also increases. That is, risk distribution increases among countries. In contrast, if weight of economic risk increases, then the risk of the Eastern European countries which has higher economic risk also increase generally.

Furthermore, this study classified countries into four groups by comparing country risk with investment attractiveness. As a result, Afghanistan, Cambodia, and Tanzania appear to have both high risk and high investment attractiveness at the same time. On the other hand, Singapore and the Middle East oil-producing countries(Kuwait, Saudi Arabia, UAE, etc.) show high investment attractiveness with low country risk. In contrast, Czech Republic, Argentina, and Romania are analyzed to have both low country risk and low investment attractiveness.

This study has following implications.

First, risk-rated countries should provide more transparent and accurate information regarding their own economic, political, and social situation. Results of country risk studies can vary by departments in charge or individuals who evaluate, and providing transparent information to external rating agencies can enhance the trustworthiness of said nations in international society as well. In this regard, Korea also needs to ensure internal economic stability and inform international community of its national condition.

Second, the Korean companies need to bear in mind that country risk is different depending on regions and nations. The unpredictability of business operations in countries with high political risk can be high because of political connections. For businesses that entered into regions with high economic risk should seek various instruments to hedge such risk. Furthermore, in case of businesses that are interested in regions or nations that have restrictive indicators about country risk or attractiveness, such as Myanmar, they should conduct a more thorough risk assessment and market research in advance.

Finally, research about country risk of developing countries should continue according to a long-term perspective, rather than ending in fragmentary analysis. The change in the economic condition of developing countries is more rapid than that of developed countries, so it is necessary to supplement risk assessment methodology and monitor changes regularly. Furthermore, as Korea is higher in terms of dependency on foreign trade, Korea needs not only to keep an eye on risk of major trading partner countries including developing countries but also to evaluate foreign risks of Korea to establish a foundation for stable economic growth.