More on country analysis

Country analysis: the science and art of reducing a country, in all its complexity, to a single judgment -- will this country achieve stability?

Country analysis is undertaken for many reasons, so the field is broad.

In business, you’ll find a general split between the risk side and the return side. On the risk side, you have country risk management for financial institutions (e.g. banks, insurers, hedge funds) which generally involves avoiding too high an exposure to too risky a country, with a view to preventing catastrophic loss. There’s also corporate credit management, with similar goals -- taking care that not too many customers from a risky place have outstanding debts at the same time. In these cases the main concern is financial and economic -- will the country be able to maintain economic stability and continue to make international payments?

Also on the risk side is the world of political risk. People use the phrase to mean different things. But in general, the concern is that threats such as war, revolution, insurrection, government seizure of assets, or discriminatory regulation, may cause a loss for a business operating abroad. The analysis here is always micro -- some businesses are unaffected by most political events, for instance offshore oil platforms. But a macro picture is always needed. These days the focus tends to be on arbitrary regulation and political violence.

There are also lots of reasons to conduct country analysis on the return side. Global businesses are always searching for the hottest markets for their products -- given limited resources, they can’t go everywhere at once, so it pays to go to the fastest-growing and most stable places.

The emerging market investment community on Wall Street and in the City is a self-contained world of traders, analysts, portfolio managers and strategists, making bets on global fixed income and equity markets. Even those investing in individual foreign stocks know that macro-events can really move the markets. (This is also true for developed countries such as the U.S., where stock returns are well above the norm -- averaging 15.8 percent -- during the third year of each presidential term.) Most of Wall Street’s country research is done by economists, but some political scientists are rising stars.

Outside of business, there’s the world of foreign policy and development, where the majority of country analysts are employed. A good deal of country analysis is done by the State Department (in the U.S.), the intelligence services, the military, the Treasury Department, non-governmental organizations and pressure groups, and so on. You’ll find professional country analysts in all of these places.

This analysis is done to advise the makers of foreign policy, military strategy, and institutions giving development aid. A trend of recent years has been the tying of development aid to political and economic stability -- rewarding good policies. America’s Millennium Challenge Account is probably the most aggressive such scheme thus far.

This is only a brief, but we hope a useful, overview of country analysis. For more information browse our Guide to country analysis resources and Reviews of private companies undertaking country analysis.