Free Online Course in International BusinessKnowledge StatementKnowledge of Commercial, Economic, and Political Risks of Buyer and Buyer's CountryGoalThe goal of this material is to introduce you to the concepts of commercial, economic and political risks found in a buyer's country, including understanding these risks and their effect on timely payment and financing international transactions.Learning ObjectiveYou will be able to:• identify commercial risk and its impact on timely payment of international transactions. • identify economic risk and its impact on timely payment of international transactions. • identify political risk and its impact on timely payment of international transactions. IntroductionAn international manager needs to avoid the main pitfalls of country risk assessment by looking for information in a variety of places, conducting relevant analysis, and changing opinions if necessary. A company must set acceptable risk objectives based on its reward goals and risk tolerance. The key to reducing risk is a thorough assessment of the country and customers. Maintaining a systematic approach for each customer and country in this analysis will assure that each evaluation is consistent, relevant, and objective.Ensuring Timely PaymentOne approach to country risk assessment is to use "CAMEL" to analyze:• Capital Adequacy = financial status based on a countrys balance of payments • Asset Quality = economic and financial strength based on a countrys combined natural, human, and general economic resources • Management Quality = a governments fiscal, monetary, credit policies and politics and how well these are implemented • Earnings Potential = internal and external variables that affect how well a country is achieving its capabilities • Liquidity = a nations foreign exchange cash flow prospects To ensure timely payment, an international manager needs to determine what the risk really is. These determining factors come in various forms:• non-payment• late payment • currency devaluation • import restrictions • bank problems • government issues • debt chains • tariff changes • shipping difficulties • pilferage When measuring risk to determine how prompt payments can result, an international manager should attempt to put real values on the potential loss. These will have to include the absolute cost in cash terms and the cost in relation to the anticipated profit/loss. The companys risk tolerance (established by the credit management policy) will have to be taken into consideration as well the companys specific objectives in a given country, since the goal of "maximum market penetration," for instance, will point to different defensive measures than an objective that reads "maximum cash flow." A check of the possible options for mitigating risk will reveal a number of possibilities, which need to be evaluated for anticipated benefits and costs. Alternatives could be: • agreement to open account terms • insistence on draft terms • unconfirmed L/C • confirmed L/C • insurance • arranging payment from an account the importer has abroad • forfeiting/Factoring • cash in advance • refusal to ship Because of the different way in which international markets now finance themselves and the implications such have for a risk to a seller, the following questions should be asked in the normal assessment of variables that determine country risk: • Does the country have a fixed exchange rate and free movement of international capital? • Is the exchange rate overvalued or widely deemed to be? • Has a country with similar characteristics recently experienced a currency crisis? • Is there a large budget deficit and much government debt outstanding, especially short-term, needing constant rollovers at rising interest rates? • Is there loose monetary policy and high inflation? • Is the domestic economy in, or at risk of, recession? • Is there a large current-account balance-of-payments deficit? • Is there an asset-price boom, especially a credit-driven one, occurring? • Is there a large volume of bad debt in the banking sector, coupled with a poor system of bank supervision? • Has there been a lot of unhedged foreign currency borrowing? • Are accounting standards poor, with few disclosures requirements, ambiguous bankruptcy proceedings, etc.? • Is there socio-political uncertainty?
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