Country Risk: A July 2023 Update!

Country risk is multifaceted and dynamic, driven by factors including governance, corruption, legal protection, and violence. Despite the common distinction between developed and emerging markets, country risk is a continuum, with varying levels of exposure across countries. Assessing country risk involves considering multiple dimensions, as they often correlate and influence each other. In terms of democracy, there is a trade-off between the continuous risk of democracies and the potential for discontinuous, catastrophic risk in authoritarian regimes. Globally, democracy has declined slightly since 2016, with North America and Western Europe scoring highest and the Middle East and Africa lowest. Violence can pose significant operational challenges for businesses, and peace scores reveal Iceland, Denmark, and Singapore as the most peaceful countries, while Ukraine, Russia, and parts of Africa face higher violence exposure. Corruption is a major concern worldwide, with Western Europe, Australia, and North America generally scoring lowest on corruption indices. Effective legal protection is crucial for business operations, and scores from the Property Rights Alliance indicate that North America, Europe, and parts of Asia offer stronger protection than many African and Latin American countries. Sovereign default risk, a widely used measure of country risk, can be assessed through ratings agencies and sovereign credit default spreads. Ratings agencies provide local and foreign currency ratings for sovereign debt, with lower ratings indicating higher default risk. Sovereign CDS spreads offer a market-based measure of default risk, reflecting investor perceptions of risk at the moment.