Investment Climate ICRG Country Risk Model

The Risk Components

The 22 risk components and the maximum possible number of points assigned to them are:

POLITICAL RISK COMPONENTS

FINANCIAL RISK COMPONENTS

ECONOMIC RISK COMPONENTS

As already noted, the political, financial, and economic risk rating is determined by adding together the ratings assigned to each individual risk component within the risk category to produce an aggregate risk rating in which the higher the rating the lower the risk and vice versa.

The method of calculating the Composite Political, Financial and Economic Risk Rating remains unchanged.  The political risk rating contributes 50% of the composite rating, while the financial and economic risk ratings each contribute 25%.

The following formula is used to calculate the aggregate political, financial and economic risk:


CPFER (country X) = 0.5 (PR + FR + ER)

CPFER = Composite political, financial and economic risk ratings

PR = Total political risk indicators
FR = Total financial risk indicators
ER = Total economic risk indicators


Degree of Risk
The risk points awarded to each risk component or calculated for each Risk Category or the Composite Risk show the degree of risk.  In each case, the higher the number, the lower the risk.  This enables the degree of risk to be seen within a single risk component, a Risk Category or the Composite Risk (the relative position of the actual risk points (ARP) within the total risk points (TRP), or in comparison with one or more other countries.

The ARP can also be expressed within a range of risk from, Very High to Very Low, and compared on that basis by Risk Component, Risk Category, or Composite Risk.

This is done by calculating the proportion of the TRP presented by the ARP [(ARP/TRP)X100] and reading its range from the following table.  As Composite Risk is always a proportion of 100 no calculation is necessary.

 





 



For example:
    An Investment Profile of 10.  ARP = 10; the TRP = 12.  (10/12)x100 = 83.3 = Very Low Risk.
    A Financial Risk Rating of 32.   ARP = 32; the TRP = 50 (32/50)x100 = 64.0% = Moderate Risk.
    A Composite Risk Rating of 53.  This is 53% of the total and puts it in the High Risk band.

Assessing Current Risk
The risk assessment process begins with assessing the current risk of the country in question.  This is carried out for each risk component within each risk category.  The actual ratings assigned to each risk component are determined from available information and data according to a set of guidelines for each risk component, as follows:

The Political Risk Rating
The aim of the political risk rating is to provide a means of assessing the political dangers to investors in the countries covered by ICRG on a comparable basis. This is done by assigning risk points to a pre-set group of factors, termed political risk components.  The minimum number of points that can be assigned to each component is zero, while the maximum number of points depends on the fixed weight that component is given in the overall political risk assessment.  In every case the lower the risk point total, the higher the risk, and the higher the risk point total the lower the risk.

To ensure consistency, both between countries and over time, points are assigned by ICRG editors on the basis of a series of pre-set questions for each risk component.  For most components, the set of questions used depends in turn on the type of governance applicable to the country in question.  For this purpose we have defined the following types of governance.
 
Accountable (Alternating) Democracy.  The essential features of an accountable democracy are:
A government/executive that has not served more than two successive terms;
Free and fair elections for the legislature and executive as determined by constitution or statute;
The active presence of more than one political party and a viable opposition;
Evidence of checks and balances among the three elements of government: executive, legislative and judicial;
Evidence of an independent judiciary;
Evidence of the protection of personal liberties through constitutional or other legal guarantees.

Dominated Democracy.  The essential features of a dominated democracy are:
A government/executive that has served more than two successive terms;
Free and fair elections for the legislature and executive as determined by constitution or statute;
The active presence of more than one political party;
Evidence of checks and balances between the executive, legislature, and judiciary;
Evidence of an independent judiciary;
Evidence of the protection of personal liberties.

De facto One-Party State.  The essential features of a de facto one-party state are:
A government/executive that has served more than two successive terms, or where the political/electoral system is designed or distorted to ensure the domination of governance by a particular government/executive;
Holding of regular elections as determined by constitution or statute;
Evidence of restrictions on the activity of non-government political parties (such as disproportionate media access between the governing and non-governing parties, harassment of the leaders and/or supporters of non-government political parties, the creation impediments and obstacles affecting only the non-government political parties, electoral fraud, etc).

De jure One-Party State.  The identifying features of a one-party state are:
A constitutional requirement that there be only one governing party;
Lack of any legally recognized political opposition.

Autarchy.  The identifying feature of an autarchy is:
Leadership of the state by a group or single person, without being subject to any franchise, either through military might or inherited right.

In an autarchy, the leadership might indulge in some quasi-democratic processes.  In its most developed form this allows competing political parties and regular elections, through popular franchise, to an assembly with restricted legislative powers (approaching the category of a de jure or de facto one party state).  However, the defining feature is whether the leadership, i.e., the head of government, is subject to election where political opponents are allowed to stand.

These classifications are fundamental to the ICRG rating process because our assessments of political risk in all categories are based on the premise that the more democratic the society is, the more accountable it is; and the more accountable it is, the less susceptible it is to sudden or explosive political shocks.

Assessing Political Risk
As pointed out earlier, points are awarded to each risk component on a scale from zero up to a pre-set maximum, either 12, 6, or 4.  In general terms if the points awarded are less than 50% of the total, that component can be considered as very high risk.  If the points are in the 50-60% range as high risk, in the 60%-70% range as moderate risk, in the 70-80% range as low risk and in the 80-100% range as very low risk.  However, this is only a general guideline as a better rating in other components can compensate for a poor risk rating in one component.

Overall, a political risk rating of 0.0% to 49.9% indicates a Very High Risk; 50.0% to 59.9% High Risk; 60.0% to 69.9% Moderate Risk; 70.0% to 79.9% Low Risk; and 80.0% or more Very Low Risk.  Once again, however, a better financial and/or economic risk rating can compensate for a poor political risk rating.

Government Stability - 12 Points

Fundamentally Costa Rica has good type of governance with an outstanding democratic track record.  Overall Oscar Arias and his cabinet will have to leave office in 2 years.

1. Government Unity                    (3pts)            (4pts)               
The current president Oscar Arias president and his cabinet are limited to their ability to pass their de-regulative reformplans through Congress. Due to an Executive, Legislative, and Judicial branch with the ability for one party to be in control of the executive and another party to be in control of Congress ensures checks and balances especially as open presidential elections hare held every 4 years. Currently not one party holds the required 29 votes to form a majority1. A recent development has set back as the "Failure of Last CAFTA Law Blocks Textile Investment, Supreme Court's Constitutional Chamber (Sala IV) decided that the lawmakers had missed a step in procedure and sent back the environmental law that had been passed only weeks before"2.
    The continued progress in the implementation and alignment with CAFTADR demands is threatened by nationalistic interest groups (governmentally run national social institutions INS, import tariff agencies)3

1. Legislative Strength                            (3pts)            (4pts)               
As mentioned above, the checks and balances of Costa Rica resemble somewhat those of the United States. The Legislative branch of Costa Rica enjoys a high degree autonomy from especially the executive branch4. This builds long-term confidence in the government stability and ability to counterbalance a potential temporary presidential lunatic, but increases the need for proper management of short-term political objectives potentially lagging time effective passage and implementation due to a lengthy policy process.

1. Popular support                            (2pts)            (4pts)               
Rising living costs create difficulty to retain broad public support to the government to privatize key sectors of the economy5. Oscar Arias has received the Nobel Peace Price, is internationally active6 and fairly popular.  He deserves credit for bringing the world's attention and popularity on various fronts to Costa Rica. The fact that he was just re-elected by a tiny margin illustrates his recent drop in popularity tough, limiting his legitimacy among the broad populace. His first year as president has given him credentials by improving many economic factors7, and political factors8. Because 20% of the population living in povertyXXXX tough a public political divide among income groups exists and increases and widens under privatization reforms put in place (CAFTA-DR). Pro business support Arias and the push for de-regulation, whereas the low income population objects its reforms in fear of loosing access to public welfare services currently still available and affordable.


Socioeconomic Conditions - 12 Points

1. Unemployment                     (3pts)        (4pts)

Unemployment (2007 est.): 4.6%9.  According to some resources comparing unemployment trends in Latin America, Central America is relatively stable compared to South America where unemployment rates are oftentimes increased to double digit rates10.  Costa Rica according to the UNHDR11 favourably ranks 48 in 2006 with a huge gap compared to its Central American neighbours.

1. Consumer Confidence                 (2pts)        (4pts)

Consumer confidence is despite a spike in 2007 on a record low since 200212. Costa Rica's main trading partner is the United States. Historically the real estate and tourism investment boom is primarily from North America.  With the slowdown of the US economy, the projections on consumer confidence in the USA is therefore highly pegged to Costa Rican confidence due to highly dependence on US tourist, business and real estate investments.


1. Poverty                    (xpts)        (4pts)

 
According to the World Bank Report on Poverty: "Costa Rica is well-known for its socio-economic achievements. Costa Rica compared to other Latin American standards has low levels of poverty and inequality. It also performs well compared to other countries in Latin America and the Caribbean region, and to countries with similar income levels, in health and access to basic services. Its infant and child
mortality rates are significantly lower, and its average life expectancy i s substantially higher.
Some 97 percent of Costa Ricans have access to improved water supplies - a rate that also is high
relative to comparable countries. Indeed, access to a range of basic services, including electricity
and sanitation, is generally high, as is access to suitable housing, both in absolute terms and by
regional standards"13.  Despite the



This is an attempt to measure the general impact of the government's economic policies.  In general terms, the greater the popular dissatisfaction with a government's policies, the greater the chances that the government will be forced to change tack, possibly to the detriment of business, or will fall.

Socioeconomic conditions cover a broad spectrum of factors ranging from infant mortality and medical provision to housing and interest rates.  These are encompassed methodologically by breaking the variable down into three subcomponents: 1) Unemployment (4 points) - While an unemployment level can mean different things to different populations (e.g. 5% in Japan versus 5% in Argentina), this subvariable tries to weigh the impact of an employment level on the particular society.  Thus while the same percentage might translate as a rating of "3.5" in one country, it might be "2.5" in another; 2) Consumer Confidence (4 points) - now commonly measured around the world this is a rating on the population's feelings about whether they can spend or instead need to set aside resources for a cloudy future; 3) Poverty (4 points) - like with unemployment, an official poverty level can mean different things in different countries, so a rating works better than a percentage.  Poverty is the extent to which a section of the population cannot feed or sustain itself.


Investment Profile - 12 Points

1)Contract viability an operational risk 
In general Costa Rica offers a great investment climate with foreigners having no ownership restrictions compared to nationals. XXX
According to the US Embassy in Costa Rica, risks do remain such as expropriation, maritime zones (concessions extensions, and squatters in private land ownership14. 
ON the flip side, Foreigners have to obey to the laws like citizens do, squatter rights can become a problem if not managed. Under Costa Rican law it is perfectly legal and property that is (1) non-maritime, (2) non-cultivated, and (3) unimproved agrarian land is subject to such risk15.

2)Taxation
3)Profit repatriation, currency conversion, and payment delays         (4)            (4pts)

According to the Costa Rican Investment and Trade Development Board, Costa rica has no repatriation nor currency conversion limitation to foreign investors. 
http://www.costaricaweb.com/business/cindeoperating.htm

4)         labor costs,                (  pts)            (4pts)


1) Contract viability (4 points) - this is a measure of the extent to which the government and the judicial system of the country uphold business contracts and treat foreigners and foreign firms the same way that host country nationals and firms would be treated, and treat them fairly in both cases; 2)    3)Profits repatriation (4 points) - the ability of a foreign firms to convert its profits to hard currency and to return those profits to the investors home country.  Also to be considered here is the percentage of profits that can be repatriated; 4) Payments delays (4 points) - the extent to which payments to foreign investors, whether on government contract, as a part of a private partnership investment, or in direct sales, are able to obtain cash payment for goods and services in a timely manner.

Internal Conflict - 12 points

In summary Internal threats are mainly increasing in house robberies and car thefts, kidnappings have strongly declined while petty thefts have a negative trend16. 

http://www.visionofhumanity.org/gpi/results/costa-rica/2008/    amazing site





Due to public divide on ratifying the CAFTA-DR, tens of thousands of Costa Ricans participated in a demonstration to block ratification of the free trade agreement and reject approval to implement legislation demanded by the United States.17
According to a speech by Agustín Carstens, Deputy Managing Director, International Monetary Fund, Costa Rica was without a crisis in twenty years18. Besides in increase in domestic crime, external confilcts such as foreign supporteddisputes, armed threats, exchanges of fire on borders, border incursions, foreign-supported insurgency, and full-scale warfare
Despite this calm period, various import tarifs have burdened investments in the past and continue to do so.  Costa Rica being the last of six member states to ratify the CAFTA-DR agreements puts doubt on Costa Rica's ability to commit to its reform promises. Because of required deregulation in trade and commerce lagging final approval in the Costa Rica political process this reduces investor confidence in the effectiveness of the government to implement its policies. XXXX




This is an assessment of political violence in the country and its actual or potential impact on governance.  The highest rating is given to those countries where there is no armed opposition to the government and the government does not indulge in arbitrary violence, direct or indirect, against its own people.  The lowest rating is given to a country embroiled in an on-going civil war.
 
The intermediate ratings are awarded on the basis of whether the threat posed is to government and business or only business (e.g. kidnapping for ransom); whether acts of violence are carried out for a political objective (i.e. terrorist operations); whether such groups are composed of a few individuals with little support, or are well-organized movements operating with the tacit support of the people they purport to represent; whether acts of violence are sporadic or sustained; and whether they are restricted to a particular locality or region, or are carried out nationwide.

To provide structure to the wide range of potential violence that might characterize the host country, the Internal Conflict score is divided into three subcategories: 1) Civil war (4 points) - the extent to which factions of the society are in open and physical conflict.  This may be the government on one side and a segment of the population on the other, or two factions, tribes, or religious groups fighting each other; 2) Terrorism (4 points) - terrorism is the level of violent acts perpetrated by individuals or groups with a political purpose; 3) Civil disorder (4 points) - this subvariable covers those behaviors that would normally be contained by an efficient civilian police force in a country.  These include violent demonstrations and strikes (both in level of violence and extent of involvement), criminal activity, kidnapping for monetary remuneration (i.e. income, not for the purchase of arms or other political objective), and extensive civil disobedience.

External Conflict - 12 Points


Human and Drug19Trafficing has the largest external forces on internal risk.  This is easily managed by abstinence from locations where such threats exist.  Some Research suggests that there barely any external threat related deaths20.

1. War                     (xpts)                (4 points) -
this refers to the extent of war fighting with forces of another government or from another country.  Thus, this category might include fighting with the host government forces on one side and an ethnic group from a neighboring country on the other, as well as fighting between two governments;
 2) Cross-border Conflict                 xpts            (4 points)
nflict-whether physical or verbal-that relates to border issues.  Territorial disputes are conducted in many forums ranging from media statements to UN resolutions to invasion by an armyThere has not been any cross border conflict since 198621.
 3) Foreign pressures                     3pts            (4 points)
- Costa Rica keeping a stand of neutrality, and being neither landlocked nor threatened economically by its neighbors.  The United States accounts for the greatest foreign pressure on trade liberization and other de-regulatory matters on Costa Rica.   This is seen by the many US company operating within Costa Rica.  FDI investment and foreign retirees from the United States clearly lead the way XXXX real estate.  Costa Rica is highly pressured by the US to finally ratify and implement the CAFTA-DR agreement requirements.  This US Costa Rican pressures have excisted and will continue to excist for the most part for a positive for the investor environment.  Taiwan's diplomatic departure and China's diplomatic introductionXX has its own trade related political pressures.  Also controversial fishing rights sold to Taiwan and China have finally been semi remedied by a passage of fishing regulations22.
the extent to which the host government is influenced by another government, whether an international power like the United States or a neighboring country that controls access to the sea.. Such foreign pressure might be wielded by threat of armed force or by manipulation of economic dependencies


The external conflict measure is an assessment of the risk to both the incumbent government and inward investment.  It ranges from trade restrictions and embargoes, whether imposed by a single country, a group of countries, or the whole international community, through geopolitical disputes, armed threats, exchanges of fire on borders, border incursions, foreign-supported insurgency, and full-scale warfare.

External conflicts can adversely affect foreign business in many ways, ranging from restrictions on operations, to trade and investment sanctions, to distortions in the allocation of economic resources, to violent change in the structure of society, to direct damage to employees, product, or facilities.

External conflict is measured in three subcategories: 1) War.

Corruption -             3 pts            8 Points

This is a measure of corruption within the political system.  Such corruption is a threat to foreign investment for several reasons: it distorts the economic and financial environment, it reduces the efficiency of government and business by enabling people to assume positions of power through patronage rather than ability, and, last but not least, introduces an inherent instability into the political process.

The most common form of corruption met directly by business is financial corruption in the form of demands for special payments and bribes connected with import and export licenses, exchange controls, tax assessments, police protection, or loans.  Such corruption can make it difficult to conduct business effectively, and in some cases may force the withdrawal or withholding of an investment.

Although our measure takes such corruption into account, it is more concerned with actual or potential corruption in the form of excessive patronage, nepotism, job reservations, "favor-for-favors," secret party funding, and suspiciously close ties between politics and business.  In our view these insidious sorts of corruption are potentially of much greater risk to foreign business in that they can lead to popular discontent, unrealistic and inefficient controls on the state economy, and encourage the development of the black market.

The greatest risk in such corruption is that at some time it will become so overweening, or some major scandal will be suddenly revealed, as to provoke a popular backlash, resulting in a fall or overthrow of the government, a major reorganizing or restructuring of the country's political institutions, or, at worst, a breakdown in law and order, rendering the country ungovernable.

As events in recent years have shown, such corruption can affect both rich and poor countries as well as countries with democratic and non-democratic institutions.  For example, corruption, of one kind or another, played a key role in the change of government in Japan, the reorganization of the political system in Italy, and the collapse of governmental authority and law and order in Zaire.

One of the difficulties in assessing the degree to which political corruption represents a potential risk is that much of it is hidden from general view until it suddenly erupts in a major scandal.  However, one possible early indicator of potential corruption is the length of time a government has been in power continuously.  The one feature that all three countries quoted above - Japan, Italy, and Zaire - have in common is that they have had the same party or parties in government for decades.

In assessing the corruption risk, therefore, we look first at how long a government has been in power continuously.  In the case of a one-party state or non-elected government, corruption, in the form of patronage and nepotism, is an essential prerequisite and it is therefore corrupt, to a greater or lesser degree, from its inception.  In the case of a democratic government, it has been our experience, almost without exception, that things begin to go wrong after an elected government has been in office for more than two consecutive terms, that is, eight to ten years.

On that basis, the highest risk ratings tend to signify an accountable democracy whose government has been in office for less than five years.  An intermediate rating often indicates a country whose government has been in office for more than 10 years and where a large number of officials are appointed rather than elected.  The lowest ratings are usually given to one-party states and autarchies.

Military in Politics - 6 Points

Costa Rica does not possess any military capability and therefore no military influence or risk associated with military contractors and associated other special interest groups.  By Constitution the creation of a military branch is not allowed.  The fact that Costa Rica has leveraged US open door policy commitments in a way that, in the need for military protection, the US will support Costa Rica. Costa Rica has a Guardia Nacional and Policia that are meant to check and balance themselves due to the lack of military control23. A lack of military possesses a minor operating risk in case relations with Nicaragua, natural disasters and domestic crime worsens to the point the guardia nacional and policia combined are overwhelmed with restoring order.    




Religious Tensions - 6 Points
Religious tensions may stem from the domination of society and/or governance by a single religious group that seeks to replace civil law by religious law and to exclude other religions from the political and/or social process; the desire of a single religious group to dominate governance; the suppression of religious freedom; the desire of a religious group to express its own identity, separate from the country as a whole.

The risk involved in these situations range from inexperienced people imposing inappropriate policies through civil dissent to civil war.

Law and Order - 6 Points
Law and Order are assessed separately, with each sub-component comprising zero to three points.  1) The Law (3 points) sub-component is an assessment of the strength and impartiality of the legal system, the extent of case precedent, and the consistency of legal legislation and practice; 2) the Order (3 points) sub-component is an assessment of popular observance of the law.  This is, in part, a willingness of the population to be self-regulating but also has to do with the numbers of police who enforce the law, the training of police forces and judicial employees (lawyers, judges, court clerical and technical staff), and the willingness of these forces to engage in enactment of the laws of the country.  

Thus, a country can enjoy a high rating for Law (3.0) in terms of its judicial system, but a low rating for Order (1.0) if the law is ignored for a political aim, e.g. widespread strikes involving illegal practices or insufficient numbers of lawyers to prosecute and defend accused criminals.

Ethnic Tensions - 6 Points
This component measures the degree of tension within a country attributable to racial, nationality, or language divisions.  Lower ratings are given to countries where racial and nationality tensions are high because opposing groups are intolerant and unwilling to compromise.  Higher ratings are given to countries where tensions are minimal, even though such differences may still exist.

Democratic Accountability - 6 Points

According to the Democratic Development Index - 2008 Edition24, Costa Rica is the first Latin Amercian conutnry with an index of 10. Its central American neighbors rate between 3.44 and 6.5. According to an earlier source since 1990 most president have been publicly been accused of corruption and therefore limit the democratic accountability by the broad public.

This is a measure of how responsive government is to its people, on the basis that the less responsive it is, the more likely it is that the government will fall, peacefully in a democratic society, but possibly violently in a non-democratic one.

However, assessing democratic accountability is more complex than simply determining whether the country has free and fair elections.  Even democratically elected governments, particularly those that are apparently popular, can delude themselves into thinking they know what is good for their people even when the people have made it abundantly clear that they do not approve particular policies.  Close to an election, such an attitude can have disastrous consequences (e.g., Prime Minister Thatcher's poll tax). 

Therefore, it is possible for an accountable democracy to have a lower score, i.e. a higher risk, for this component than a less democratic form of government.

Bureaucracy Quality - 4 Points
The institutional strength and quality of the bureaucracy is another shock absorber that tends to minimize revisions of policy when governments change.  Therefore, high points are given to countries where the bureaucracy has the strength and expertise to govern without drastic changes in policy or interruptions in government services.  In these low-risk countries, the bureaucracy tends to be somewhat autonomous from political pressure and to have an established mechanism for recruitment and training.  Countries that lack the cushioning effect of a strong bureaucracy receive low points because a change in government tends to be traumatic in terms of policy formulation and day-to-day administrative functions.

http://www.state.gov/r/pa/ei/bgn/2019.htm
Economy
GDP (2007): $26.23 billion.
GDP PPP (2006 est.): $52.22 billion.
Inflation (2007 est.): 10.81%.
Real growth rate (2007 est.): 7.3%.
Per capita income (2006): $5,100. (PPP $11,862, 2006 est.)
Unemployment (2007 est.): 4.6%.
Currency: Costa Rica Colon (CRC).
Natural resources: Hydroelectric power, forest products, fisheries products.
Agriculture (8.7% of GDP): Products--bananas, pineapples, coffee, beef, sugar, rice, dairy products, vegetables, fruits and ornamental plants.
Industry (28.9% of GDP): Types--electronic components, food processing, textiles and apparel, construction materials, fertilizer, medical equipment.
Commerce, tourism, and services (62.4% of GDP): Hotels, restaurants, tourist services, banks, and insurance.
Trade (2006 est.): Exports--$8.198 billion: integrated circuits, medical equipment, bananas, pineapples, coffee, melons, ornamental plants, sugar, textiles, electronic components, medical equipment. Major markets--U.S. 38.6%, China 6.8%, Hong Kong 6.4%, Netherlands 6.1%, Guatemala 4.0%. Imports--$11.576 billion: raw materials, consumer goods, capital equipment, petroleum. Major suppliers--U.S. 39.3%, Japan 5.1%, Venezuela 5.0%, Mexico 5.2%, China 4.8%, Ireland 4.5%, Brazil 3.4%.







The Financial Risk Rating
The overall aim of the Financial Risk Rating is to provide a means of assessing a country's ability to pay its way.  In essence this requires a system of measuring a country's ability to finance its official, commercial, and trade debt obligations.

This is done by assigning risk points to a pre-set group of factors, termed financial risk components.  The minimum number of points for each component is zero, while the maximum number of points depends on the fixed weight that component is given in the overall financial risk assessment.  In every case the lower the risk point total, the higher the risk, and the higher the risk point total the lower the risk.

To ensure comparability between countries the components are based on accepted ratios between measured data within the national economic/financial structure.  It is the ratios that are compared, not the data themselves.  The risk points assigned to each component (ratio) are taken from a fixed scale.

Assessing Financial Risk
As noted above, points are awarded to each risk component on a scale from zero to a pre-set maximum.  In general, if the points awarded are less than 50% of the total, that component can be considered as very high risk.  If the points are in the 50-60% range as high risk, in the 60%-70% range as moderate risk, in the 70-80% range as low risk and in the 80-100% range as very low risk. However, this is only a general guideline as a better rating in other components can compensate for a poor risk rating in one component.

Overall, a financial risk rating of 0.0% to 24.5% indicated a Very High Risk; 25.0% to 29.9% High Risk; 30.0% to 34.9% Moderate Risk; 35.0% to 39.9% Low Risk; and 40.0% or more Very Low Risk.  Once again, however, a poor financial risk rating can be compensated for by a better political and/or economic risk rating.

Foreign Debt as a Percentage of GDP - 10 points
The estimated gross foreign debt in a given year, converted into US dollars at the average exchange rate for that year, is expressed as a percentage of the gross domestic product converted into US dollars at the average exchange rate for that year.  The risk points are then assigned according to the following scale:

Ratio (%)
Points


Ratio (%)
Points
0.0-5.0
10.0


60.1-70.0
4.5
5.1-10.0
9.5


70.1-80.0
4.0
10.1-15.0
9.0


80.1-90.0
3.5
15.1-20.0
8.5


90.1-100.0
3.0
20.1-25.0
8.0


100.1-110.0
2.5
25.1-30.0
7.5


110.1-120.0
2.0
31.1-35.0
7.0


120.1-130.0
1.5
35.1-40.0
6.5


130.1-150.0
1.0
40.1-45.0
6.0


150.1-200.0
0.5
45.1-50.0
5.5


200.1 and over
0.0
50.1 - 60.0
5.0





Foreign Debt Service as a Percentage of Exports of Goods and Services - 10 points
The estimated foreign debt service, for a given year, converted into US dollars at the average exchange rate for that year, is expressed as a percentage of the sum of the estimated total exports of goods and services for that year, converted into US dollars at the average exchange rate for that year.  The risk points are then assigned according to the following scale:

Ratio (%)
Points


Ratio (%)
Points
0.0-4.9
10.0


45.0-48.9
4.5
5.0-8.9
9.5


49.0-52.9
4.0
9.0-12.9
9.0


53.0-56.9
3.5
13.0-16.9
8.5


57.0-60.9
3.0
17.0-20.9
8.0


61.0-65.9
2.5
21.0-24.9
7.5


66.0-70.9
2.0
25.0-28.9
7.0


71.0-75.9
1.5
29.0-32.9
6.5


76.0-80.9
1.0
33.0-36.9
6.0


81.0-84.9
0.5
37.0-40.9
5.5


85.0 and over
0.0
41.0-44.9
5.0





Current Account as a Percentage of Exports of Goods and Services - 15 points
The balance of the current account of the balance of payments for a given year, converted into US dollars at the average exchange rate for that year, is expressed as a percentage of the sum of the estimated total exports of goods and services for that year, converted into US dollars at the average exchange rate for that year.  The risk points are then assigned according to the following scale:

Ratio (%)
Points


Ratio (%)
Points
+25 and over
15.0


-50.1 to -55.0
7.0
20.1 to 25.0
14.5


-55.1 to -60.0
6.5
15.1 to 20.0
14.0


-60.1 to -65.0
6.0
10.1 to 15.0
13.5


-65.1 to -70.0
5.5
5.1 to 10.0
13.0


-70.1 to -75.0
5.0
0.0 to 5.0
12.5


-75.1 to -80.0
4.5
-0.1 to -5.0
12.0


-80.1 to -85.0
4.0
-5.1 to -10.0
11.5


-85.1 to -90.0
3.5
-10.1 to -15.0
11.0


-90.1 to -95.0
3.0
-15.1 to -20.0
10.5


-95.1 to -100.0
2.5
-20.1 to -25.0
10.0


-100.1 to -105.0
2.0
-25.1 to -30.0
9.5


-105.1 to -110.0
1.5
-30.1 to -35.0
9.0


-110.1 to -115.0
1.0
-35.1 to -40.0
8.5


-115.1 to -120.0
0.5
-40.1 to -45.0
8.0


    Below -120.1
0.0
-45.1 to -50.0
7.5





Net International Liquidity as Months of Import Cover -     Xpts            5 points






The total estimated official reserves for a given year, converted into US dollars at the average exchange rate for that year, including official holdings of gold converted into US dollars at the free market price for the period, but excluding the use of IMF credits and the foreign liabilities of the monetary authorities, is divided by the average monthly merchandise import cost, converted into US dollars at the average exchange rate for the period.  This provides a comparative liquidity risk ratio that indicates how many months of imports can be financed with reserves.  The risk points are then assigned according to the following scale:

Months

Points


Months
Points
Over 15
5.0


3.1-4.0
2.0
12.1-15.0
4.5


2.1-3.0
1.5
9.1-12.0
4.0


1.1-2.0
1.0
6.1-9.0
3.5


0.6-1.0
0.5
5.1-6.0
3.0


0.0-0.5
0.0
4.1-5.0
2.5





Exchange Rate Stability -             xpts            10 points
The appreciation or depreciation of a currency against the US dollar (against the German mark in the case of the US) over a calendar year or the most recent 12-month period is calculated as a percentage change.  The risk points are then assigned according to the following scale:

Appreciation



Depreciation
Chhan

Change, plus
Points


Change, minus
Points
0.0-9.9
10.0


0.1-4.9
10.0
10.0-14.9
9.5


5.0-7.4
9.5
15.0- 19.9
9.0


7.5-9.9
9.0
20.0- 22.4
8.5


10.0-12.4
8.5
22.5- 24.9
8.0


12.5-14.9
8.0
25.0- 27.4
7.5


15.0-17.4
7.5
27.5- 29.9
7.0


17.5-19.9
7.0
30.0- 34.9
6.5


20.0-22.4
6.5
35.0- 39.9
6.0


22.5-24.9
6.0
40.0- 49.9
5.5


25.0-29.9
5.5
50 or more
5.0


30.0-34.9
5.0




35.0 - 39.9
4.5




40.0 - 44.9
4.0




45.0 - 49.9
3.5




50.0 - 54.9
3.0




55.0 - 59.9
2.5




60.0 - 69.9
2.0




70.0 - 79.9
1.5




80.0 - 89.9
1.0




90.0 - 99.9
0.5




100 or more
0.0

The Economic Risk Rating
The overall aim of the Economic Risk Rating is to provide a means of assessing a country's current economic strengths and weaknesses.  In general terms where its strengths outweigh its weaknesses it will present a low economic risk and where its weaknesses outweigh its strengths it will present a high economic risk.

These strengths and weaknesses are assessed by assigning risk points to a pre-set group of factors, termed economic risk components.  The minimum number of points that can be assigned to each component is zero, while the maximum number of points depends on the fixed weight that component is given in the overall economic risk assessment.  In every case the lower the risk point total, the higher the risk, and the higher the risk point total the lower the risk.

To ensure comparability between countries the components are based on accepted ratios between measured data within the national economic/financial structure.  It is the ratios that are compared, not the data themselves.  The points assigned to each component (ratio) are taken from a fixed scale.

Assessing Economic Risk
As noted above, points are awarded to each risk component on a scale from zero up to a pre-set maximum.  In general terms if the points awarded are less than 50% of the total, that component can be considered as very high risk.  If the points are in the 50-60% range as high risk, in the 60%-70% range as moderate risk, in the 70-80% range as low risk, and in the 80-100% range as very low risk. However, this is only a general guideline as a better rating in other components can compensate for a poor risk rating in one component.

    Overall, an economic risk rating of 0.0% to 24.5% indicates a Very High Risk; 25.0% to 29.9% High Risk; 30.0% to 34.9% Moderate Risk; 35.0% to 39.9% Low Risk; and 40.0% or more Very Low Risk.  Once again, however, a poor economic risk rating can be compensated for by a better political and/or financial risk rating.

GDP Per Head - 5 points
The estimated GDP per head for a given year, converted into US dollars at the average exchange rate for that year, is expressed as a percentage of the average of the estimated total GDP of all the countries covered by ICRG.  The risk points are then assigned according to the following scale:

% of average
Points


% of average
Points






250 +
5.0


40-49.9
2.0
200-249.9
4.5


30-39.9
1.5
150-199.9
4.0


20-29.9
1.0
100-149.9
3.5


10-19.9
0.5
75-99.9
3.0


Up to 9.9
0.0
50-74.9
2.5





Real GDP Growth - 10 points
The annual change in the estimated GDP, at constant 1990 prices, of a given country is expressed as a percentage increase or decrease.  The risk points are then assigned according to the following scale:
Change (%)
Points


Change (%)
Points
6.0 +
10.0


-0.5 to- 0.9
4.5
5.0 to 5.9
9.5


-1.0 to -1.4
4.0
4.0 to 4.9
9.0


-1.5 to -1.9
3.5
3.0 to 3.9
8.5


-2.0 to -2.4
3.0
2.5 to 2.9
8.0


-2.5 to -2.9
2.5
2.0 to 2.4
7.5


-3.0 to -3.4
2.0
1.5 to 1.9
7.0


-3.5 to -3.9
1.5
1.0 to 1.4
6.5


-4.0 to -4.9
1.0
0.5 to 0.9
6.0


-5.0 to -5.9
0.5
0.0 to 0.4
5.5


-6 or more
0.0
-0.1 to -0.4
5.0




Annual Inflation Rate - 10 points
The estimated annual inflation rate (the unweighted average of the Consumer Price Index( is calculated as a percentage change.  The risk points are then assigned according to the following scale:
Change (%)
Points


Change (%)
Points
0-1.9
10.0


22.0-24.9
4.5
2.0-2.9
9.5


25.0-30.9
4.0
3.0-3.9
9.0


31.0-40.9
3.5
4.0-5.9
8.5


41.0-50.9
3.0
6.0-7.9
8.0


51.0-65.9
2.5
8.0-9.9
7.5


66.0-80.9
2.0
10.0-11.9
7.0


81.0-95.9
1.5
12.0-13.9
6.5


96.0-110.9
1.0
14.0-15.9
6.0


111.0-129.9
0.5
16.0-18.9
5.5


130.0 +
0.0
19.0-21.9
5.0




Budget Balance as a Percentage of GDP - 10 points
The estimated general government budget balance (excluding grants) for a given year in the national currency is expressed as a percentage of the estimated GDP for that year in the national currency.  The risk points are then assigned according to the following scale:
Ratio (%)
Points


Ratio (%)
Points
4.0 +
10.0


-6.0 to -6.9
4.5
3.0 to 3.99
9.5


 7.0 to -7.9
4.0
2.0 to 2.99
9.0


-8.0 to -8.9
3.5
1.0 to 1.99
8.5


-9.0 to -9.9
3.0
0.0 to 0.99
8.0


-10.0 to -11.9
2.5
-0.1 to -0.9
7.5


-12.0 to -14.9
2.0
-1.0 to -1.9
7.0


-15.0 to -19.9
1.5
-2.0 to -2.9
6.5


-20.0 to -24.9
1.0
-3.0 to -3.9
6.0


-25.0 to -29.9
0.5
-4.0 to -4.9
5.5


-30.0+
0.0
-5.0 to -5.9
5.0




Current Account as a Percentage of GDP - 15 points
The estimated balance on the current account of the balance of payments for a given year, converted into US dollars at the average exchange rate for that year, is expressed as a percentage of the estimated GDP of the country concerned, converted into US dollars at the average rate of exchange for the period covered.  The risk points are then assigned according to the following scale:

Ratio (%)
Points


Ratio (%)
Points
10.0+
15.0


-16.0 to -16.9
7.0
8.0-9.9
14.5


-17.0 to -17.9
6.5
6.0-7.9
14.0


-18.0 to -18.9
6.0
4.0-5.9
13.5


-19.0 to -19.9
5.5
2.0-3.9
13.0


-20.0 to -20.9
5.0
1.0-1.9
12.5


-21.0 to -21.9
4.5
0.0-0.9
12.0


-22.0 to -22.9
4.0
-0.1 to -0.9
11.5


-23.0 to -23.9
3.5
-1.0 to -1.9
11.0


-24.0 to -24.9
3.0
-2.0 to -3.9
10.5


-25.0 to -26.9
2.5
-4.0 to -5.9
10.0


-27.0 to -29.9
2.0
-6.0 to -7.9
9.5


-30.0 to -32.4
1.5
-8.0 to -9.9
9.0


-32.5 to -34.9
1.0
-10.0 to -11.9
8.5


-35.0 to -39.9
0.5
-12.0 to -13.9
8.0


-40.0+
0.0
-14.0 to -15.9
7.5





Making Risk Forecasts
At the same time as the current risk assessments are produced, one- and five-year risk forecasts are produced using the same methodology.

Three forecasts are produced for each time period - a Worst Case Forecast (WC Forecast), a Most Probable Forecast (MP Forecast) and a Best Case Forecast (BC Forecast).

The WC Forecast is produced by extrapolating the worst-case trend for each risk component in each risk category to produce a WC Forecast for Political, Economic, and Financial Risk.

The MP Forecast is produced by extrapolating the most probable trend for each risk component in each risk category to produce a MP Forecast for Political, Economic, and Financial Risk.

The BC Forecast is produced by extrapolating the best-case trend for each risk component in each risk category to produce a BC Forecast for Political, Economic, and Financial Risk.

A Composite Risk Rating is also produced for each of the three forecasts in both time periods. 

Worst Case and Best Case Forecasts
The WC and BC Forecasts do not represent the possible extremes of risk, but a "reasonably possible" outcome of the negative and positive trends within each risk component.  Such trends could be an accelerating build-up of debt, political fragmentation, worsening ethnic or religious tensions, adequate arrangements for government takeover in the case of the death or assassination of a leader, and so on.  In approaching the forecasting exercise we make a judgment as to the "reasonableness" of the trend or event identified and the ability of the government to counteract such trends.  This is the basis on which the WC and BC forecasts are determined.

Thus, it is possible for a country to produce a worse performance than our WC forecast or a better performance than our BC forecast, but we do not see such an outcome as likely.

Most Probable Forecast
The MP Forecasts is not a mean or median measure between the WCF and BCF, but a trend established by assuming that a government is aware of the negative trends we have established to produce the WCF and takes action to avoid them or mitigate their affects.

Analyzing the Forecasts
The forecasts lend themselves to a variety of analyses.  We find the following the most useful - Risk Stability, Downside Risk, and Upside Risk.

Risk Stability
A country can appear to present a solid basis for investment on the basis of an acceptable level of risk in terms of its current Composite Risk Rating and its MP Forecast Composite Risk Rating.  However, these numbers give no indication of how stable that assessed situation is.   - i.e. to what degree that risk assessment might vary.

We have made an attempt to measure this stability or instability by introducing the concept of Risk Stability.

In our forecasting system the Risk Stability of an individual country is the difference between the WCF and the BCF and represents the volatility or stability of risk for that country.  The greater the difference, the greater is the volatility or the less the stability.

Downside Risk
This is a measure of the degree to which a Risk Category could reasonably be expected to deteriorate if the negative trends noted in the risk components are not compensated for, and is expressed as the difference between the MP forecast and the WC Forecast.  The greater the difference, the greater the downside risk.

Upside Risk
This is a measure of the positive potential of the country that could be realized if the positive trends identified in the risk components are fully exploited in conjunction with a generally favorable environment.  It is expressed as the difference between the MP Forecast and the BC Forecast.  The greater the difference, the greater the upside risk.

Tailoring the System
The ICRG system as it stands is produced for the general user, that is, it looks at the overall risk of country in terms of the general risk it represents.

Some users may require a more specific risk assessment that is geared to their own particular interests.  For example, a company engaged in international tourism will be interested in country risk as it applies to its desirability as a vacation destination.  In this case the general risk assessment may not be of much help - it is possible for a country to present a High Risk in its Composite Risk Rating, but not present a significant risk to holidaymakers because its composite risk is pulled down by such factors as low financial or economic risk, a poor investment climate, and other non-threatening factors.  On the other hand, a different country might enjoy a Moderate Risk in its Composite Risk Rating because it has a stable government and acceptable economic/financial management, but still present a risk to tourists because of high crime, religious conflict, and so on.

In such cases, a better understanding of the specific risk presented can be the ascertained by looking at the assessments for individual risk components, such as internal conflict, external conflict, law and order, religious tensions, etc.

Another approach to making ICRG more specific to a particular user needs is for the user to change the weighting (Total Risk Points) of the components he/she is interested in, while reducing the weight of components of lesser interest.  For example, keeping with the international travel company, one could increase the weighting of the Religious and Ethnic tensions components from 6 to, say 12, while reducing the weighting of, say, the Investment Profile, Bureaucracy Quality, and Democratic Accountability components to compensate.

Cross-Checking
ICRG provides not only the risk ratings for the countries it covers, but also the political information and financial and economic data on which those ratings are based.  It is therefore possible for the user to check through the information and data so as to assess the ratings given against his or her own assessments or against some other risk rating system.

Conclusion
This, then, is the working system by which ICRG assesses the possibilities of a successful venture into a foreign market.  Learning to apply either the ICRG or Political Risk Services system can play a vital role in your investment and business decisions.  Know the risks and you will be miles ahead of the competition as you seek business opportunities around the globe.
Find ( gdp per headd of population)   range along the 140 countries