COUNTRY RISKS • Most OECD & many non-OECD countries have GSE’s insuring FDI against political risk. • Political Risk – World Bank definition: Political risks are associated with government actions which deny or restrict the right of an investor/owner i) to use or benefit from his/her assets; or ii) which reduce the value of the firm. Political risks include war, revolutions, government seizure of property and actions to restrict the movement of profits or other revenues from within a country OECD uses a variety of macro measurements to construct country risk classification for trade credit insurance. Link OECD COUNTRY RISK CLASSIFICATION 2013 8 7 6 5 4 3 2 1 0 Currency Controls: Malaysia • In current financial markets, many emerging markets will impose currency controls to keep hot money from entering the market. • In 1998, Malaysia implemented controls to keep foreign investors from exiting the market forcing them to wait 1 year to repatriate financial income. Link Nationalization: Venezuela Venezuela FDI (% of GDP) 8 7 6 5 1 -1 Link Chavez: Venezuela will nationalize gold mines -2 2010 2009 2008 2007 2006 2005 2004 2003 2002 2001 2000 1999 1998 0 1997 Venezuelan President Hugo Chavez said Wednesday he had ordered the nationalization of at least some of the operations of the U.S.-based food giant Cargill and threatened to do the same with the Caracas-based food maker Polar 2 1996 Chavez orders nationalization of Cargill 3 1995 Link x 4 Polity IV Theories of Conflict World Development Report 2011 Chapter 2 • Rapid Change and Rising Expectations • Voracity and Resource Curse • Horizontal Inequality • Lack of State Capacity • Poor Institutions. Political violence associated with: • Rapid Urbanization • Youth Unemployment • Income Inequality • Weak Governance • Low growth, low income countries with high natural resource share more than 10 times as likely to experience political violence. Link Link Regimes • Autocracy: Self-perpetuating regime with ability to strictly limit activities of political opposition. • Anocracy: Regime w/o electoral democracy but lacking means to completely eliminate opposition or lacks direct instruments of selfperpetuation. • implementing a staged transition from autocracy to greater democracy. • institute piecemeal reforms due to increasing demands from emerging political groups. • weakened by corruption or dissension and losing their capacity to maintain strict political controls and suppress dissent. Anocracies are by far most likely to see government threatening instability. OECD Developing Country Risk 6.3 6.1 5.9 5.7 5.5 5.3 5.1 4.9 4.7 4.5 Democracy Open Anocracy Closed Anocracy Autocracy Global Report 2014 Conflict, Governance, and State Fragility Link Polity IV data set Fiscal RISKS Debt IMF Fiscal Monitor Figure 2. Sovereign Bond Yield Spreads over German Bunds (Basis points) 1800 1600 C ountries w ith Program s Supported by EU /IMF 1400 1200 G reec e 1000 Crisis spreads to other countries 800 Irelan d 600 Po rtug al 400 Ro man ia 200 Latv ia 0 J an -10 Ap r-10 J ul-10 O c t-10 J an -11 Ap r-11 J ul-11 450 IMF Fiscal Monitor Selected European C ountries 400 350 300 Sp ain 250 Background Reading 200 150 Italy 100 50 Belg ium Neth erlands Fin land 0 J an -10 Ap r-10 J ul-10 O c t-10 J an -11 Ap r-11 J ul-11 Sources: Bloomberg L.P.; Datastream. Note: 10-year sovereign bond yields. DebtEnd This Year DebtEnd Last Year Overall DeficitThis Year General ExpenditureThis Year General RevenueThis Year Overall DeficitThis Year Overall DeficitThis Year Overall BalanceThis Year Primary Deficit • Simplified Government Budget Primary Revenue (less Interest Income) - Primary Expenditure (less Interest Paid) Primary Budget Deficit + Net Interest Payments on Existing Debt Overall Budget Deficit Sustainable Deficit • If Overall DeficitThis Year g V DebtLast Year GDPThis Year (1 g V ) GDPLast Year then Debt-to-GDP ratio stays stable. • If > then deficit is “unsustainable” A growing economy allows the government to borrow some money every year and still keep debt in line with overall GDP Sustainable Primary Deficit Overall DeficitThis Year Primary DeficitThis Year Net InterestThis Year GDPThis Year GDPThis Year GDPThis Year ~ Debt Last Year i (1 g V ) GDPLast Year Average Interest Net InterestThis Year GDPThis Year • If Primary DeficitThis Year g V i DebtLast Year GDPThis Year (1 g V ) GDPLast Year then ( Net ) Debt GDP stays stable. Primary Balance % of GDP • 1/1/2013 1/1/2012 1/1/2011 1/1/2010 1/1/2009 1/1/2008 1/1/2007 1/1/2006 1/1/2005 1/1/2004 1/1/2003 1/1/2002 1/1/2001 1/1/2000 1/1/1999 1/1/1998 1/1/1997 1/1/1996 1/1/1995 1/1/1994 1/1/1993 1/1/1992 1/1/1991 1/1/1990 1/1/1989 1/1/1988 1/1/1987 1/1/1986 1/1/1985 1/1/1984 1/1/1983 1/1/1982 1/1/1981 1/1/1980 % o GDP Net Debt to GDP, Greece 200 180 Value, 181.837 160 140 120 100 80 60 40 20 0 http://www.imf.org/external/pubs/ft/fm/2011/02/fmindex.htm 32.9062534.5 34.5 Debt as % of GDP Gross Debt Net Debt 233.1 165.6 72.3 94.6 79.984.1 52.5 22.8 7.7 109.3 101.2 98.8 86.9 81.082.6 50.2 41.1 44.3 34.9 67.1 57.2 31.6 0.0 1.8 6.0 0.0 0.0 121.1 71.1 67.5 130.6 106.0 101.8 93.5 100.4 65.5 55.4 32.0 30.8 30.635.3 7.8 100.0 44.9 43.6 80.8 72.9 72.6 67.4 56.0 52.4 50.8 36.0 0.0 0.0 0.0 -1.7 -20.8 -59.7 -161.0 Consequences of Deficits • Austerity • Financial Repression • Seignorage • Default Link GDP per capita (constant LCU) 20000 19000 18000 17000 16000 15000 14000 13000 12000 11000 10000 2008 [YR2008] 2009 [YR2009] 2010 [YR2010] 2011 [YR2011] 2012 [YR2012] 2013 [YR2013] Financial Repression • Indebted governments often draw financing from captive financial institutions to keep interest rates low. • Domestic banks, public pension funds • Increased reserve requirements • International capital controls. Link Seignorage - Central Bank prints money to buy government debt. Link Default Link Final Exam • Saturday, December 13th, LG5201 12:30-3:30. • Cumulative. Similar to mid-term and practice exams. • Bring writing instruments and a calculator. • Semi-open book – Bring 1 A4 size paper with handwritten notes on both sides. • Office Hours: Standard TR 4:30-5:30 and MW 2-3:30. Can you run a deficit every year? DebtThis Year Debt Last Year Overall DeficitThis Year 1 V GDPThis Year (1 g ) GDPLast Year GDPThis Year DebtThis Year Debt Last Year GDPThis Year GDPLast Year Debt Last Year (1 g V ) Debt Last Year Overall DeficitThis Year 1 V V (1 g ) GDPLast Year (1 g ) GDPLast Year GDPThis Year Overall DeficitThis Year g V Debt Last Year GDPThis Year (1 g V ) GDPLast Year