I see and appreciate the efforts of the President in trying to convince and coerce foreign investors to take a chance on Nigeria. But some of us know that his strategy is for optics. Anyone who has worked in a global financial institution or just has friends in one can ascertain that investment is made by indices/metrices and less by ‘friendliness’. Every investor needs ROI and sadly our President’s first few decisions in offices traumatized past and future investments and continual dysfunction of institutions has eroded investors confidence. From lack of autonomy of the CBN and a lack of transparency in government spending to pay as you go justices, the list goes on. WE NEED STRONG AND AUTONOMOUS INSTITUTIONS!

Before my copy-paste article, one word for those you think foreigners are unaware of the massive corruption in Nigeria, you’re ‘naive’. Every where I’ve been, Nigeria is the poster boy for corruption. Word travels faster than you can imagine, in addition our political class wears corruption as a badge of honor.

Now to the lengthy text…

Evaluating Country Risk for International Investing
By BRIAN PERRY Updated June 22, 2022
Reviewed by CIERRA MURRY
Many investors place a portion of their portfolios in foreign securities. This decision involves an analysis of various mutual funds, exchange traded funds (ETFs), or stock and bond offerings; however, investors often neglect an important first step in the process of international investing. The decision to invest overseas should begin with determining the riskiness of the investment climate in the country under consideration.

Country risk refers to the economic, political, and business risks that are unique to a specific country, and that might result in unexpected investment losses. This article will examine the concept of country risk and how it can be analyzed by investors.

Economic and Political Risk
Consider three main risk sources when investing in a foreign country:

Economic Risk
This risk refers to a country's ability to pay back its debts. A country with stable finances and a stronger economy should provide more reliable investments than a country with weaker finances or an unsound economy.

Political Risk
This risk refers to the political decisions made within a country that might result in an unanticipated loss to investors. While economic risk is often referred to as a country's ability to pay back its debts, political risk is sometimes referred to as the willingness of a country to pay debts or maintain a hospitable climate for outside investment.

Even if a country's economy is strong, if the political climate is unfriendly (or becomes unfriendly) to outside investors, the country may not be a good candidate for investment.

Sovereign Risk
This is the risk that a foreign central bank will alter its foreign exchange regulations, significantly reducing or nullifying the value of its foreign exchange contracts. Analyzing sovereign risk factors is beneficial for both equity and bond investors, but perhaps more directly beneficial to bond investors.

When investing in the equity of specific companies within a foreign country, a sovereign risk analysis can aid in creating a macroeconomic picture of the operating environment, but the bulk of research and analysis would need to be done at the company level.

On the other hand, if you're investing directly into a country's bonds, evaluating the economic condition and strength of the country can be a good way to evaluate a potential investment in bonds. After all, the underlying asset for a bond is the country itself and its ability to grow and generate revenue.

Developed, Emerging, and Frontier Markets
There are three types of markets for international investments:

Developed Markets
These markets consist of the largest, most industrialized economies. Their economic systems are well developed. They are politically stable and the rule of law is well entrenched. Developed markets are usually considered the safest investment destinations, but their economic growth rates often trail those of countries in an earlier development stage.

Investment analysis of developed markets usually concentrates on the current economic and market cycles. Political considerations are often less important. Examples of developed markets include the United States, Canada, France, Japan, and Australia.

Emerging Markets
Emerging markets experience rapid industrialization and often demonstrate extremely high levels of economic growth. This strong economic growth can sometimes translate into investment returns that are superior to those available in developed markets; however, investing in emerging markets is also riskier than investing in developed markets.

There is often more political uncertainty in emerging markets, and their economies may be more prone to booms and busts. In addition to carefully evaluating an emerging market's economic and financial fundamentals, investors should pay close attention to the country's political climate and the potential for unexpected political developments. Many of the fastest-growing economies in the world, including China, India, and Brazil, are considered emerging markets.

Frontier Markets
These markets represent "the next wave" of investment destinations. These markets are generally either smaller than traditional emerging markets or are found in countries that place restrictions on the ability of foreigners to invest. Although frontier markets can be exceptionally risky and often suffer from low liquidity, they also offer the potential for above-average returns over time.

Frontier markets are also not well correlated with other more traditional investment destinations, which means that they provide additional diversification benefits when held in a well-rounded investment portfolio. As with emerging markets, investors in frontier markets must pay careful attention to the political environment, as well as to economic and financial developments. Examples of frontier markets include Nigeria, Botswana, and Kuwait.

Measuring Country Risk
Just as corporations in the United States receive credit ratings to determine their ability to repay their debt, so do countries. In fact, virtually every investable country in the world receives ratings from Moody's, Standard & Poor's (S&P), or the other large rating agencies.

A country with a higher credit rating is considered a safer investment than a country with a lower credit rating. Examining the credit ratings of a country is an excellent way to begin analyzing a potential investment.
Another important step in deciding on an investment is to examine a country's economic and financial fundamentals. Different analysts prefer different measures, but most experts turn to a country's gross domestic product (GDP), inflation, and consumer price index (CPI) readings when considering an investment abroad.

Investors will also want to carefully evaluate the structure of the country's financial markets, the availability of attractive investment alternatives, and the recent performance of local stock and bond markets.

Sources of Information on Country Risk
There are many excellent sources of information on the economic and political climate of foreign countries. Newspapers such as The New York Times, The Wall Street Journal, and the Financial Times dedicate significant coverage to overseas events. Many excellent weekly magazines also cover international economics and politics.

The Economist is generally considered the standard-bearer among weekly publications. International editions of many foreign newspapers and magazines can also be found online. Reviewing locally produced news sources can sometimes provide a different perspective on the attractiveness of a country under consideration for investment.

Important Steps When Investing Overseas
Once a country analysis has been completed, several investment decisions need to be made. The first is to decide where to invest by choosing among several possible investment approaches, including investing in:

A broad international portfolio
A more limited portfolio focused on either emerging markets or developed markets
A specific region, such as Europe or Latin America
A specific country or countries
Remember that diversification, a fundamental principle of domestic investing, is even more important when investing internationally. Choosing to invest an entire portfolio in a single country is not prudent.

In a broadly diversified global portfolio, investments should be allocated among developed, emerging, and perhaps frontier markets. Even in a more concentrated portfolio, investments should be spread among several countries to maximize diversification and minimize risk.

After deciding where to invest, an investor must decide which investment vehicles to invest in. Investment options include sovereign debt, stocks or bonds of companies domiciled in the country(s) chosen, stocks or bonds of a U.S.-based company that derives a significant portion of revenue from the country(s) selected, or an internationally focused ETF or mutual fund.

The choice of investment vehicle depends on each investor's individual knowledge, experience, risk profile, and return objectives. When in doubt, it may make sense to start out by taking less risk. More risk can always be added to the portfolio later.

In addition to thoroughly researching prospective investments, an international investor also needs to monitor their portfolio and adjust holdings as conditions dictate.

As in the United States, economic conditions overseas are constantly evolving, and political situations abroad can change quickly, particularly in emerging or frontier markets. Situations that once seemed promising may no longer be so. And countries that once seemed too risky might now be viable investment candidates.

What Are Examples of Country Risk?
Country risks include all of the potential risks that can occur in a nation that could impact investments in that nation, whether that be capital investments or security investments. Such risks include political risks, climate risks, and social risks. Specifically, these consist of civil wars, mass protests, earthquakes, and so on.

How Do You Measure the Country Risk of a Nation?
The most common way to measure a country's risk is through its sovereign rating. A sovereign rating is a rating compiled through an analysis of various qualitative and quantitative factors of a country. Sovereign ratings are calculated and provided by the main global rating agencies, which are Moody's, S&P, and Fitch.

What Countries Have the Highest Risk?
The countries with the highest risk include Venezuela, Mozambique, Yemen, Libya, and Haiti.
6

The Bottom Line
Overseas investing involves a careful analysis of the economic, political, and business risks that might result in unexpected investment losses. This country risk analysis is a fundamental step in building and monitoring an international portfolio. Investors that use the many excellent information sources available to evaluate country risk will be better prepared when constructing their international portfolios.

https://www.investopedia.com/articles/stocks/08/country-risk-for-international-investing.asp#:~:text=Different%20analysts%20prefer%20different%20measures,when%20considering%20an%20investment%20abroad.

Read, and share…