Euromoney Country Risk Q3 2013 results: Methodology
More than 400 economists and other experts from a range of financial and other institutions take part in Euromoney’s Country Risk Survey. They evaluate the risks faced by international investors in more than 180 markets, scoring countries across a range of political, economic and structural criteria. These are added to values for capital access, credit ratings and debt indicators, and aggregated each quarter to provide a total risk score.
Euromoney Country Risk (ECR) is an online community of economic and political experts that provide real time scores in 15 categories that relate to economic, structural and political risk. The consensus expert scores, combined with data from the IMF/ World Bank on debt indicators, a survey of debt syndicate managers at international banks on access to capital and Moodys/Fitch credit ratings create the Euromoney Country Risk score (100) for 187 individual countries.
ECR evaluates the investment risk of a country, such as risk of default on a bond, risk of losing direct investment, risk to global business relations etc, by taking a qualitative model, which seeks an expert opinion on risk variables within a country (70% weighting) and combining it with three basic quantitative values (30% weighting).
The qualitative score is visible independently of the ECR score, and it reflects a snapshot of a country’s current position.
All ECR members are able to score countries, but only members evaluated as experts or star experts have their score submitted to the qualitative average.
The ECR score is displayed on a 100 point scale, with 100 being nearly devoid of any risk, and 0 being completely exposed to every risk. This is also visually represented on each country page by red, meaning more risk, and green, meaning less risk.
Combined Euromoney Country Risk score
To obtain the overall ECR country risk score, Euromoney assigns a weighting to six categories. The three qualitative expert opinions are political risk (30% weighting), economic performance (30%), and structural assessment (10%). The three quantitative values are debt indicators (10%), credit ratings (10%), access to bank finance/capital markets (10%).
The qualitative average
The qualitative average is produced by combining evaluations of political, economic, and structural assessments from experts around the world.
When applying political, economic, and structural assessments to a 100 point scale for the qualitative average only (rather than the full Euromoney Country Risk score), the following weighting is used: political 43%, economic 43%, and structural 14%.
Economic risk: participants rate each country for which they have knowledge from 0-10 across 6 sub factors to equal a score out of 100. The categories of economic risk scored are as follows: bank stability/ risk; GNP outlook; unemployment rate; government finances; monetary policy/ currency stability.
Political risk: participants rate each country for which they have knowledge from 0-10 across 5 sub factors to equal a score out of 100. The categories of political risk scored are as follows: corruption; government non-payments/ non-repatriation; government stability; information access/ transparency; institutional risk; regulatory and policy environment.
Structural risk: participants rate each country for which they have knowledge from 0-10 across 4 sub factors to equal a score out of 100. The categories of structural risk scored are as follows: demographics; hard infrastructure; labour market/ industrial relations; soft infrastructure.
Individual experts must apply a value to each sub factor before their score is accepted into the system.
Individual experts can also modify the sub factor weights to modify their effect on the overall score of 100. The weight of an individual sub factor can be lowered to a minimum of 10% and to a maximum of 30%. This allows the system to capture a second attribute along side of the evaluation of that category, which is the estimated effect of the category. For instance, a user may make a judgement that the single most important issue facing a given country is maintaining the stability of its currency, and so decide to increase the weighting of the monetary policy/ currency stability category from 20% to 30%.
Within each sub factor, ECR also asks experts for further information on the reasons behind each individual score, and these fall under the category of related factors. These are more like poll points, and do not directly affect the score. Instead, they inform a change made to a sub factor score and weight. For example, within the economic risk category of bank stability lie four further related factors: regulatory risk, trading exposures, asset quality and undercapitalisation. Individual experts are able to add more related factors and ignore ones which are not applicable.
The quantitative score factors
• Access to bank finance/capital markets: participants rate each country's accessibility to international markets on a scale of 0-10 (0=no access at all and 10=full access). These scores are averaged and then weighted to 10%.
• Debt indicators: calculated using the following ratios from the World Bank's Global Development Finance figures: total debt stocks to GNP (A), debt service to exports (B); current account balance to GNP (C). Developing countries which do not report complete debt data get a score of zero.
• Credit ratings: nominal values are assigned to sovereign ratings from Moody's, Standard & Poor’s and Fitch IBCA. The ratings are converted into a score using a set scoring chart. This score is then averaged and the score weighted to 10%. The higher the average value the better.
Where there is no rating, countries score zero.
Please complete all the assessments (economic, political and structural) for the countries which you are scoring.
It is important to note that regardless of a user’s privacy settings, your individual score is always private and no other experts or subscribers in the system can see it.
Bank stability/risk: a measure of banking sector strength. 10 = a perfectly functioning system with all possible exposures comfortably covered. 0 = a systemic breakdown in the banking system has occurred.
Economic-GNP outlook: a measure of optimism/ pessimism for the for economic growth outlook. 10 = a strong likelihood of unprecedented and transformational growth. 0 = a strong likelihood of a catastrophic recession.
Employment/ unemployment: measures the risk posed to the economy by unemployment. 10 = unemployment poses no risk to the economy. 0 = unemployment poses a critical threat to the economy.
Government finances: measures a country's fiscal strength. 10 = the fiscal position is highly solid and consistently generates huge surpluses. 0 = the fiscal position is unsustainable and default is almost certain to occur .
Monetary policy/currency stability: a measure of monetary policy effectiveness/exchange rate risk. 10 = monetary policy is totally credible, effectively implemented and exchange rate risk is non-existent. 0 = monetary policy lacks any credibility and that the currency has already collapsed.
Corruption: a measure of how corruption affects country risk. 10 = there is no corruption. 0 = corruption is endemic and a serious drag on stability and a major contributor of risk.
Government non-payments / non-repatriation: a measure of the risk government policies and actions pose to financial transfers. 10 = there is a non-existent risk of government interference. 0 = there is an extremely high risk of government interference.
Government stability: a measure of how stable a government is. 10 = the government is extremely stable. 0 = the country has no functioning government and has already become a failed state.
Information access/transparency: a measure of the accessibility and reliability of information and statistics. 10 = the flow of information is completely unrestricted/ data is timely and highly reliable. 0 = the flow of information is totally restricted/ no reliable statistical data exists.
Institutional risk: a measure of the independence and efficiency of state institutions. 10 = institutions are extremely efficient and totally independent. 0 = state institutions are non-existent.
Regulatory and policy environment: a measure of the quality of the regulatory environment and how well policy is formulated/ implemented. 10 = an extremely consistent, well-enforced regulatory environment and benevolent government policies. 0 = no regulatory environment exists.
Demographics: a measure of the impact of the demographic profile on economic growth and political stability. 10 = an economically sustainable birth rate and a low dependency-ratio that is resulting in unprecedented, long-term economic growth. 0 = demographic imbalances have catastrophically affected economic growth and political stability
Hard infrastructure: a measure of the adequacy of a country's physical infrastructure. 10 = physical infrastructure meets all the country’s foreseeable needs and is perfectly-maintained. 0 = physical infrastructure is non-existent/entirely inadequate for a country’s needs.
Labour market/industrial relations: a measure of the suitability of the labour environment for economic growth and political stability. 10 = a well-regulated and functioning labour environment. 0= a restrictive, volatile and unregulated labour environment.
Soft infrastructure: a measure of the health of the economic, medical and cultural/social institutions of a country. 10 = a highly skilled labour force, well supported by perfectly functioning social institutions. 0 = a country’s social institutions are non-existent or have totally broken down.