Economist Newspaper Limited. - The Economist Guide to Country Risk: How to identify, manage and mitigate the risks of doing business across borders

GUIDE TO COUNTRY RISK

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The Economist in Association with Profile Books Ltd. and PublicAffairs

Copyright The Economist Newspaper Ltd, 2014

Text copyright Mina Toksz, 2014

First published in 2014 by Profile Books Ltd. in Great Britain.

Published in 2014 in the United States by PublicAffairs, a Member of the Perseus Books Group

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Library of Congress Control Number: 2014949753

ISBN 9781-610394871 (EB)

First Edition

10 9 8 7 6 5 4 3 2 1

Contents

List of case studies

List of figures

List of tables

THE IDEA FOR THIS BOOK was hatched following a lecture I gave on country risk at Manchester Business School in 2011, at the height of the euro-zone sovereign debt crisis. I would like to thank Ismail Erturk, director of the MSc Executive Management programme on banking and financial services, who noted that there was not much written on the topic. I took up this suggestion when I left Standard Bank in 2013, having been head of the country risk team for international operations since 2001. The enthusiasm of colleagues and friends then propelled me along. From Standard Bank, I am grateful to Nina Triantis, global head of telecoms, John OMulloy, managing director, Jiri Choteborsky, director telecoms and media, and Sophie Papasavva, now a founding member of EFMC Loan Syndicates LLP, for their support and input to the Roshan and Wataniya case studies. I would like especially to thank Laura Rattner, my long-term colleague now heading the western hemisphere country risk team at Macquarie Group, Deborah Bekker at Standard Bank, Alistair Newton, managing director at Nomura International, and Helena Huang at Chatham House for their contributions to excellent case studies on Argentina, Nigeria, North Korea and China respectively.

I began working on country risk early in my professional career as editorial director of the Economist Intelligence Units Country Risk Service in the late 1980s. But I would not have been in a position to write a book on this topic without the rich experience gained through working for a unique emerging-markets bank, Standard Bank, which was expanding its reach globally in the remarkable decade of the 2000s. It would not be possible to list everyone, but people who made my work more enjoyable include Neil Holden, a mathematical wizard, and Arnold Gain, with whom we set up the overall framework for country risk, and Santiago Assalini and Annerie Cornelissen, who provided the steely nerves and support during the challenging days of the 200809 crisis.

I am also grateful to Daniel Franklin, executive director at The Economist, for introducing me to Profile Books where Paul Lewis encouraged me to take up big themes and Penny Williams tidied up the material so nicely. The big themes idea led me to the discovery of a wonderful book, Against the Gods, by Peter Bernstein, which matched my own thinking on risk: yes, there are many risks out there in this complex world, but humanity has the ability to manage most of them. This is what this book is about. This is the message I would like to give my daughter, Ozan, as well as thanking her for telling me to stop procrastinating when my attention was flagging. And last but not least, I want to thank my partner, Bernhard Blauel, for the long years of support that allowed me to focus on my work.

Mina Toksz

August 2014

Country risk what can go wrong when business is conducted across borders can affect any company, any time, anywhere. Its importance must be understood not just by bankers, insurers and other corporate risk managers but by anyone with commercial interests abroad. Whether you are running a factory, investing in a pension fund, or just importing or exporting, it can be perilous to ignore what is going on in overseas markets. As the Arab spring political events in 2011 and the global financial crisis in 200809 demonstrated, upheaval in one country can send powerful shock waves far beyond its borders.

Major payments crises occur with alarming regularity. A decade before the banking and sovereign (or public) debt crisis of the southern euro-zone economies, there was a debt default in Argentina in 2001; Turkey had a banking and payments crisis in 2000; Russia defaulted in 1998, a year after the Asian financial crisis, which itself followed a series of defaults in Latin America and Africa in the early 1980s. Further back, there were big defaults in the inter-war years and during the first era of globalisation in the 19th century.

There are always economic and political shocks happening somewhere in the world with the potential to spread. In 2013, the focus of concern was emerging markets and how they would fare if the US Federal Reserve tightened monetary policy. In 2014, it seemed that the Fed was not going to tighten much for some time and the focus moved to a potential bubble brewing in the US corporate bond market. In the past few years, risk managers could fret about the consequences of Cypruss banking collapse, Syrias civil war, the wobbles in the Chinese financial sector, the Ukraine crisis and the global or regional impact of possible international sanctions on Russia. The impact of such faraway events is easily transmitted through financial, banking and trade flows to all corners of the world economy. There are also upside risks to factor in, such as the lessening of sovereign default risks in the euro zone over 2013, which also need managing.