Country and political risk analysis is an important service for any company looking to invest overseas, particularly in developing countries or areas prone to conflict. There are numerous services out there that will give you an indepth rundown on your country of choice such as The Economist Intelligence Unit, Control Risks Group and Political Risk Services. These firms not only tell you where you money will disappear outright, they will also give you advice on how to manage possible risk you face on investing in certain countries. One way to mitigate any losses incurred due to political strife is to invest in risk insurance. OPIC and MIGA are examples of such insurance brokers. The Handbook of Country and Political Risk gives some examples of types of losses covered by insurance (pp. 4):
- Inconvertibility, action taken by a government to prevent conversion of local currency
- Expropriation or Nationalization, government seizes property or assets of foreign investor without full compensation
- War Damage, losses resulting from international conflict
- Civil Strife Damage, losses generated from internal conflict
This is just a sample of what is available out there, and gives you an insight into the thought processes of international investors. Furthermore, you can imagine some of the overlap with states looking to invest aid money or export security overseas. For a good rundown on the methodology of some of the major risk firms check out The Handbook of Country and Political Risk. Countryrisk.com also provides a number of web resources related to country and political risk analysis.
Happy investing!
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Comments to this entry
Tiu Fu Fong
February 21, 2006
3:44 am
Furthermore, an institutional investor engaging in asset/project financing will often get consultants to advise on political risks specific to the project area (eg if you're financing a dam, they will advise on such things as local unrest and disputes near the site, local police/military bribe expectations, etc).
Another form of risk management often used is background checks on key "principals" involved in a deal. This is less to do with political/country risk and more to do with risk of fraud or other dodginess. Services such as Kroll (www.kroll.com) offer in-depth background checks. Their reports range from public records-based searches (eg internet, press, litigation records) through to quite in-depth investigation, which can include covert interviews with employees, past and present business associates, etc. For example, I received a report on a principal to one of my deals recently which included comments from interviews with factory employees of a factory owned by the principal, where the interviews were conducted 2 years prior to our engagement of the service provider - obviously they have extensive databases and ongoing intelligence gathering.
Tiu Fu Fong
February 21, 2006
3:53 am