Is country risk assessment an exact science?

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pohnpei397 | College Teacher | (Level 3) Distinguished Educator

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Certainly not.  There is no way that it can be.

In order to exactly determine the level of risk associated with any particular country, it is necessary to determine the likelihood of all possible scenarios that might have an impact on a firm that invested in that country.  This is clearly impossible to do in any exact way.  Let us take two examples to show why this is so.

First of all, let us look at the example of Egypt.  Before the start of this year, very few people would have said there was much risk of the Mubarak government being overthrown.  Therefore, Egypt would have been seen as a politically stable country.  Even if someone did think that Mubarak might be overthrown, it would be extremely difficult to put an accurate number on that likelihood.  You cannot really say that there is a 60% chance (as opposed to a 50% chance) that a country's government will be overthrown.  Therefore, it is impossible to exactly define how much political risk there is in a country like Egypt.

Second, look at Japan and the impact of the earthquake and tsunami.  This was a natural event, not a human one, and should therefore be easier to forecast.  However, there is no way to accurately assess the risk of such a disaster happening in any given year or decade.  Scientists don't know with any specificity when an earthquake will happen or where or how strong it will be.  This makes exact assessment of risk impossible.

There are too many things that can happen to affect a firm's investment in a country.  The variety of things that can happen make it impossible to exactly assess the level of country risk.

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