Expert on Investment Attractiveness and Country Risk

Before investing in a country, a competent investor always takes into account country risks. Our expert, Dr. Nikolai Trifonov, FRICS tells what it means and why the 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 of investing foreign funds in a project in a given country associated with the loss (in whole or in part) of the project’s value due to the overall economic, financial and sociopolitical factors in this country.

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

When calculating a country risk premium for a country, the basis of the calculation is an information about the yields of securities (long-term government bonds, usually denominated in US dollars), which are traded in international markets — this gives an indicator Rpr. In that case, the country risk is calculated against the US dollar, because the US securities are denominated in this currency. This necessitates to use in the calculation the current yield of treasury constant maturities of the US government that gives the magnitude of risk-free rate 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 of a country 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. But this is not the only indicator of a country’s investment attractiveness and it should not be taken as an absolute.

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 he will be able to go «plus» with such a sale.

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

Over the last month, the country risk premium has decreased in most of the countries in analysis. However, almost half of the countries increased the magnitude of their CRP. Finland (with the lowest country risk premium at the date of calculation), as well as the UAE, Slovenia, Indonesia, and Sweden should be considered the most attractive for investment, while Russia (with the highest country risk premium calculated for it), Belarus, and Ukraine should be considered the least attractive among the countries in analysis.