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Foreign Investing: Evaluating Country Risk

When it comes to offshore investing, there is a unique type of investing that you don’t find with other investments. However, you may be aware already that foreign investing contains country risk. It will vary from country to country and also with the changes economy do you need to know how to evaluate country risk if you want to be successful.

Basically the country risk is the chance that changes in the business environment will happen and change the amount of profit you could make from doing business in that country. Some countries carry more risk than others. These risks will also fluctuate over time. These changes can greatly affect the assets of foreign investors like yourself so you need to understand how to evaluate the risk properly.

There are different risk categories that are usually used to help determine the country risk of a specific country. These are:

• Economic risk - refers strictly to the fiscal policies of a specific country and its government.

• Exchange rate risk – Refers to unexpected movements in the exchange rate that in the past have caused a risk for investors. There are usually ways to reduce or avoid this problem.

• Transfer risk – the risk that occurs when a foreign government restricts capital movements. It applies to all types of investments.

• Geographic risk – This can happen with the trading partners of a country or with countries with similar characteristics.

• Sovereign risk – This happens when a government is unlikely to be able to pay back loan obligations or meet those obligations and it may run out of the foreign exchange.

• Political risk – This can happen from changes in the party that is ruling the country as happens with elections or even time of war. When the government of a country changes, it can affect things such as the exchange and foreign investments.

Now that you are aware of the type of risks that can be involved, you will need to know how to measure each country that you are investing in or considering investing in so that you know how much risk it carries and if it is more than your personal risk limit. Make a list of the potential risk and existing risks of each type and get an overall risk factor score for each country. This can help you evaluate which are and which are not, good options for you.