Country risk

POLITICAL RISK
The stability, predictability, and transparency of a country's political institutions are important considerations in analyzing the parameters for economic policymaking, including how quickly policy errors are identified and corrected. It is the degree to which politics is contrary to interest and welfare, the frequency of changes in government and any public security concerns. Relations with neighbouring countries are studied. Military threats place a significant burden on fiscal policy.

INCOME AND ECONOMIC STRUCTURE
Lower scores are given to countries with relatively narrow economies, weak or less-developed financial systems, and wide income disparities. Lower rankings may also echo highly leveraged or undeveloped private sectors and large and relatively inefficient public sectors.

Higher scores to countries which are working for economic reforms like the reduction of fiscal imbalances in order to strengthen macroeconomic stability, labour market flexibility, to strengthen the domestic financial sector, and to open trade and services globally generally follow.

ECONOMIC GROWTH PROSPECTS
Important consideration are that a government in a country with a poor or stagnant economy can less readily support public sector debt and withstand unexpected economic and political shocks than government in a country with a growing standard of living and income distribution can more readily.

FISCAL FLEXIBILITY
It is measured by an assessment of government revenue, expenditure, and trade balance. Fiscal trends, along with methods of deficit financing and their inflationary impact are important indicators of country credit quality.

GENERAL GOVERNMENT DEBT BURDEN
A sovereign with an untarnished track record of honouring debt obligations and a strong domestic capital market receive a better score than country with lower debt-to-GDP ratios but higher and more variable debt-servicing burdens.

EXTERNAL LIQUIDITY
Balance-of-payments pressures generally can be traced back to flawed economic policies. A key quantitative measure in this criteria category is gross external financing needs as a percent of current account receipts (CAR) plus usable foreign exchange reserves.

EXTERNAL DEBT BURDEN
The main focus is on trends in the public sector external debt position, the size of the government's contingent liabilities, and the adequacy of foreign-exchange reserves to service both public and private sector foreign currency debt.