ECTS : 6
Description du contenu de l'enseignement :
What is Country Risk? And what is not country risk? What is Sovereign risk? Why and how to differentiate it from country risk? What is the nexus of country risk? Is a banking crisis a country risk? Is the focus short-term or longer term? What are the drivers and the indicators that are most relevant in defining it? What is the impact of sovereign & country risks on other counterparty risks? What are non-sovereign country risks? What is Sovereign ESG risk?
Originally assessed as a part of general risks of cross-border lending and investments in the early 1980’s, country risk analysis has become much wider and now includes all types of risks, for investors, travellers, or anyone trying to compare countries to each other on a macro-level. This course, rather than analysing specifics of any one method, one institution or one school of theory, provides students with an overview of best practices. The course is taught in 3-hour discussions for a total of 36 hours over one semester. Country Risk Analysis is aimed at intermediate students in Economics/Finance/Political Science, and will provide an understanding of what drives country risk in a non-technical way, and how it is assessed in practice within rating agencies, international organisations, and financial institutions. A shorter version of the course, is also available in four sessions of 3 hours each (Taxonomy of country risks, core Sovereign risk drivers, default scenarios (fiscal, external, political), other country risks and Stress Testing).
General Course Outline (some minor changes may occur):
Compétence à acquérir :
The main objective of the course is to help students understand by identifying, classifying, and assessing economic, financial and political factors, the impact of country risk. On a more practical basis, students will be able to present data in a summarised way, study the main country risks, baseline view, and latest developments of country risk; identify and present the main downside risks.
First, we begin with a meta method on classifying country risk. In particular, we use risk taxonomy as a tool to classify country risk. The first objective is to make students quickly understand country risks in the context of their audience i.e. what risks are they most concerned with, and then to classify these risks. The classification will be done by impact, final risks and by drivers. They will learn how to avoid common pitfalls especially when reading the news when a country event arises. Then, with the information available, how to classify the most important risks currently in a specific country.
Second, we want to help understand the core drivers of country risk, and in particular the drivers of sovereign risk, and other country risks. They are the classic factors of economic growth and structural indicators (and recession risk), fiscal risks, external imbalance risks (BOP, FX, external financing), and political and institutional risks. All these risks are both analysed in the short and medium term. The same risks can be tailored to a specific sectoral risk: banking sector risks, corporate sector risks, household debt risks, shadow banking risks. Finally, we will analyse the other country risks (generally more for the FDI risks) such as country legal risk, country reputational risk, sustainability risks, and in particular the Environmental, Social and Governance (ESG) integration to sovereign risk, as well as other country operational risks (security, expropriation, corruption).
Third, the objective is to give students basic techniques of assessing country risk: Rather than teaching one unique way of assessing country risk, the course will provide students with a general set of skills and techniques, focusing on those techniques which are the most useful and practical, adapting method with the risks, using available data, and types of audiences. Three types of methodologies for country risk analyses will be analysed along with their strengths and weaknesses, as well as the main types of country reports: (i) the data/quantitative models and their assumptions, early warning indicators (ii) scoreboards and the example of the “Macroeconomic imbalance procedure scoreboard” of the EU; (iii) the mix methods: sovereign rating methodology used by the credit rating agencies and their evolution; and (iv) the typical text/ country risk reports, with the adaptation to the types to audiences.
Fourth, the course will help students understand the links between country risks. How a sudden stop can be the result of external shocks, fiscal risks, political crisis. How a BOP crisis leads to a FX crisis, Sovereign default. How economic performance can affect the financial sector and how a weak financial sector can negatively affect sovereign creditworthiness. How policies can improve/aggravate situations.
By the end of the course, students will be able to:
Mode de contrôle des connaissances :
The numerical grade distribution will dictate the final grade. The passing grade for a course is 10/20.
Class participation: Active class participation – this is what makes classes lively and instructive. Come on time and prepared. Class participation is based on quality of comments, not quantity.
Exam policy: In the exam, students will not be allowed to bring any document (except if allowed by the lecturer). Unexcused absences from exams or failure to submit cases will result in zero grades in the calculation of numerical averages. Exams are collected at the end of examination periods.
Bibliographie, lectures recommandées :
Suggested Readings:
Basic materials will be electronically available sources for which the links will be provided at the time the course begins. Please find under a selection of books and articles that can be used for the course will include: