From NYU/Stern's Aswath Damodaran's personal substack, Musings on Markets, July 13:
The Drivers and Measures of Country Risk
It has been my practice for the last two decades to take a detailed look at how risk varies across countries, once at the start of the year and once mid-year. In most years, the differences between the two updates are small, and often ignorable, but this year's update brings significant changes for many reasons. The first is the retreat of risk capital, which I talked about in my last post, not only affects the flow of capital and repricing of the riskiest assets (high yield bonds, money losing companies) within each asset class, but also has consequences for the flow of capital across geographies, with riskier countries feeling the effect more than safer countries. The second is that this has been a consequential year for country risk shifts, with Russia's invasion of Ukraine upending risk not only for those countries, but also in the region, and tumult in Sri Lanka and Pakistan playing out as risk to investors in both countries.
Country Risk: Drivers and Measures
An investment in Nigeria or Turkey clearly exposes a firm or investor to more risks than an otherwise similar investment in Germany or Canada, but why? Some of the differences can be traced to the stability and growth prospects of the underlying economies, some to political and legal structures and some to geography. Rather than provide a laundry list, I attempted to summarize the four key drivers of country risk differences in the table below:
Let’s start with political structure, i.e., the extent of political freedom and democracy in a country, a sensitive topic and one that is open to subjective measurements, and draw on a democracy index score computed by the Economist Intelligence Unit (EIU) every year, with the most recent one mapped below:....
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