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INTRODUCTION This report will examine the concept of country risk and the techniques of country risk analysis as they apply to China and Indonesia Particular reference will be made to the economic and political environments in these two countries and how they relate to country risk China has been chosen since some analysts have argued that since it escaped the worst of the Asian financial crisis it might now be affected Indonesia is used as a counterpoint in terms of that crisis The report has been commissioned by the United States Merchant Bank Daredevil Investment Trust Corporation COUNTRY RISK Companies and Banks such as the United States Merchant Bank use country risk analysis to assess various categories of risks for their businesses Typically there are always a number of factors which determine the overall risk for investments Political economic financial external and the investment climate to name a few Often these are weighted to reflect the risks for any particular project Similarly the questions posed in conducting the analysis also take into account the projects particular requirements A sampling of typical questions is included below Is the political environment stable How well developed is the institutional framework How credible is government policy What is the outlook for the domestic economy growth inflation consumption income savings investment debt fiscal policy etc Is the country willing and able to fulfil its payment obligations How receptive is the foreign investment climate Is the current account position positive or manageable What is the exchange rate risk EEAU1999 There are three main classifications of risk involved in international lending They are sovereign risk where even though and when a particular country is able to meet its obligations a country will repudiate its obligations Bourke 1990 political risk which can occur in the domestic and international situation and which means that any actions taken by governments which interfere with that particular countrys ability to pay its international loans
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