Government interference
While it’s less likely today that a government will fully expropriate a company’s assets or investments, government interference is the most predominant risk we rate. A government can target a company by adopting a series of measures that have the same effect as expropriation. For example, think of an incoming regime that cancels a key permit for a mine. This rating also gives exporters a better understanding of the business climate in a particular country since it includes indicators, like corruption, rule of law and the regulatory environment.
Political violence
If government interference is sometimes difficult to pinpoint, political violence is more tangible to grasp. Unlike criminal violence, say from drug cartels, we’re measuring the likelihood of violent acts in a country that could either overthrow a government or change government policies. As an example, look at recent events in Ecuador, in which demonstrators attacked government offices to protest the elimination of a fuel subsidy.
Transfer and conversion
Finally, rounding out the political risks section is transfer and conversion risk. Conversion restrictions include measures that prevent companies from converting local currency to hard currency (such as the U.S. dollar), while transfer restrictions are measures that inhibit the transfer of hard currency out of the country. A topical example would be Argentina, where, faced with economic and financial crisis, the government is implementing policies to reduce large outflows of foreign exchange.
Sovereign rating
In some emerging markets, the government or sovereign often play a significant role in the economy. For transactions that involve the state, our team produces a sovereign rating to measure the probability of non-payment. This rating combines the macroeconomic ability and willingness of a government to meet its payment obligations. For example, a country might have very low public debt, but has a history of payment arrears. It’s, therefore, a blend of economic and political risks. For example, we recently downgraded Nigeria’s sovereign rating due to its growing external debt, slow pace of structural reforms and growing security concerns.
While these are all risks that have a medium- to long-term horizon, the short-term commercial rating we assign is based on a one-year forecast, which measures the average commercial default rate in a country.
