Country Risk Reports and Their Limits

globeFor a recent project I took an in-depth look at risk factors in a number of emerging economies, including political, economic, financial, environmental, and regional risks.

A number of firms – such as A.M Best, The Economist Intelligence Unit, BMI Research/Fitch, IHS, and others – offer free or fee-based reports. Some even provide risk scores or ratings that can be compared across countries or over time.

It is important to source a variety of reports to compare and contrast the analysis and methodologies in order to get a complete picture, but as Professor Aswath Damodaran noted in a recent blog post, these reports offer non-market, point-in-time measures that may miss crucial, dynamic information and developments:

There are two problems with non-market measures like risk scores or sovereign ratings. The first is that they are neither intuitive nor standardized. Thus, a PRS [Political Risk Services] score of 80 does not make a country twice as safe as one with a PRS score of 40. In fact, there are other services that measure country risk scores, where high numbers indicate high risk, reversing the PRS scoring. The second is that these non-market measures are static. Much as risk measurement services and ratings agencies try, they cannot keep up with the pace of real world developments. Thus, while markets reacted almost instantaneously to Brexit by knocking down the value of the British Pound and scaling down stock prices around the globe, changes in risk scores and ratings happened (if at all) more slowly.

For my report, I included some recent market measures as well as news items in order to round out the picture, but it is critical to always be explicit about what elements remain outside the scope of research reports.