Expert on Investment Attractiveness and Country Risk

Investment attractiveness of states and their country risk: current magnitudes

Before investing in a country, a competent investor always takes into account country risks. Our expert, Prof. Nikolai Trifonov, FRICS tells what it means and why a country risk premium could be useful not only for investors but also for ordinary property buyers.

What is a country risk premium and how it is calculated?

The Country Risk Premium (CRP) is a premium for the risk associated with investing foreign funds in a project in a given country — specifically, the risk of a total or partial loss of the project’s value due to the overall economic, financial and socio-political factors characteristic of that country.

The country risk premium can be interpreted as a country-to-country difference in the investment return of the valuation currency, that is, as the difference in the investment yield of the currency unit in the country in question and the country issuing the currency unit.

Country risk is usually considered relative to the US dollar. When calculating the country's CRP, the basis is information on the current yield of securities (long-term government bonds, usually denominated in US dollars) that are traded on international markets, this indicator is designated Rpr. The current value of the yield on US government treasury bonds gives the required value of the risk-free rate of R0.

As a result, the country risk premium formula is as follows:

CRP = (1 + Rpr) / (1 + R0) — 1

— Why is the calculation of country risk premiums interesting for a typical real estate buyer?

— Knowledge of the level of country risk helps the investor to assess the prospects of investments in the given direction, — said Nikolai Trifonov. — The country risk premium indicator is a part of the formulas for assessing the performance of investment projects, as well as for the valuation of assets in that country, primarily real estate and business. 

It is important for an ordinary property buyer to know the level of the country risk premium to understand the real value of an apartment or a house in a country on the international real estate market. And if he plans to sell this property in the future, this indicator will help him to assess how likely it is to go «plus» with such a sale.

The magnitude of the country risk premium should not be taken too literally. When researching a capital-intensive project, such as an enterprise, it is recommended to consider other indicators of a country's investment attractiveness as well. However, it is important to start with the country risk.

The current summary table of country risk premiums (against the US dollar) for the various countries is given below.

Over the past month, the country risk premium has decreased in the vast majority (almost 90%) of the countries included in the analysis. China (with the lowest country risk at the calculation date), Canada, Germany, Finland, Sweden, as well as Azerbaijan, the UAE and Chile would be recognized as the most attractive countries for investment, while Ukraine (with the highest country risk premium) and Belarus would be considered the least investment-attractive of the countries included in the analysis. The Australian government does not directly issue bonds denominated in US dollars; therefore, bonds issued by the Commonwealth Bank of Australia, a state-regulated entity, were used for the settlements. The German government does not directly issue bonds denominated in US dollars; therefore, bonds of the German bank Credit Union for Reconstruction KfW (Kreditanstalt für Wiederaufbau), guaranteed by the Federal Republic of Germany, were used for the settlements.