Although country risk has been around for a long time, this report comprises a series of articles prompted by the dramatic increase in country risk as a result of the war in Ukraine and the associated geostrategic turmoil we have witnessed in recent weeks. Furthermore, geopolitical multipolarity, the economic crisis, and the consequences of climate change have the potential to cause many other socio-political instabilities. The world clearly demands a new operating paradigm and balance of powers, and such transformations inevitably involve periods of increased uncertainty.
The financial industry is going to be severely impacted by these changes, as country risk is multi-faceted and influenced by a multitude of factors. Thus, it is beneficial to recall the key concepts in order to facilitate navigation in the sea of information and identify the analyses that correspond appropriately to the specific needs.
To begin, it is critical to distinguish between some frequently used and often misused terminology in the field of country risk, as well as to establish a basic common taxonomy. Country risk is considered to be an umbrella term that encompasses a set of interdependent economic, political, and social ‘sub-risks’. In this regard, it includes macroeconomic, exchange rate, sovereign, legal, regulatory, political, and socio-cultural factors.
This four-part report will be released over the next week. Part one examines the notion of country risk throughout the previous two centuries with a focus on prior 'blind spots', the evolving nature of country risk, and its contemporary scope and impacts. Part two delves into aspects of uncertainty and focuses on country risk management covering available data sources, quantitative and qualitative methodological settings of country risk assessment, country risk ratings, and available mitigation techniques.
Part three examines political risk as a broader term and geopolitical risk as its specific subcategory. This topic is crucial in the current circumstances, as geopolitical risk has been emphasised in all aspects of financial sector operations. This was recognised, for example, in the European Securities and Markets Authority’s latest Report on Trends, Risks and Vulnerabilities stating that, "resilience will critically depend, in particular, on the ability of markets to deal with geopolitical tensions building in eastern Europe”. Additionally, regional and global spill over effects are particularly highlighted in the geopolitical context.
Part four is dedicated to sovereign risk, or the possibility of a domestic or foreign sovereign defaulting. The associated matter of transfer risk will also be discussed. In this context, it is vital to consider not just a direct exposure of a particular actor or financial sector segment, but also the indirect exposures through the typical contamination channels of a globalised world. Moreover, the global general political and economic environment is highly dependent on the relevant sovereign risk(s).
Other topics are also being considered for this series, including case studies addressing current affairs and most prominent country risk examples, implications for a particular financial sector segments and various dependency links, as well as the regulatory framework and available responses to crisis emergencies. Furthermore, in terms of country risk, issues such as pandemics and health emergencies, climate change crisis and ESG concerns, potential repercussions of the fourth industrial revolution, and growing cybersecurity threats should be considered.
You can read part one of the report, here.
