Expert on Investment Attractiveness and Country Risk

Investment attractiveness of States and their country risk: current values

Before investing in a country, a competent professor takes into account country risks. Our expert, Prof. 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 a 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 the cross — country difference in the investment return of the valuation currency, that is, as the difference in the investment return of the monetary unit in the country in question and the issuing country of the monetary unit.

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. Country risk is usually considered relative to the US dollar. 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 value of the country risk premium has increased in the vast majority (81%) of the countries included in the analysis. This was most pronounced in Indonesia (it jumped by 108 percentage points) and Egypt (increased by 90 percentage points). In contrast, the risk for Ukraine dropped particularly sharply (by 269 percentage points), for Canada - by 29 percentage points, and for Russia - by 23 points. China (with the lowest CRP value at the calculation date), Canada, Sweden, as well as Finland, Slovenia, and Chile should be considered the most attractive countries for investment, while Belarus (with the highest country risk premium) and Ukraine should be considered the least attractive of the countries included in the analysis.. In accordance with Sweden's financial policy, exchange trading of its government bonds denominated in US dollars stopped this year, and therefore the value of the CRP for Sweden was calculated based on the yield of bonds denominated in Swedish kronor.