A big boost for business from pricing local risks: international standards for assessing country risk

RMA Journal, The, May, 2003 by George J. Vojta, Carl F. Adams

* The score for Singapore ties with Thailand and Indonesia.

* The United Arab Emirates, exceptional oil wealth notwithstanding, ranks 55th out of 83 with a score of 20 out of 100. While this may seem low for such a rich country, it must be noted that UAE's compliance only recently improved to this level from last place with the recent release of the IMF's Financial Sector Assessment Program (FSAP) report.

* For those risk managers familiar with Brazil and Argentina, the public records reveal that both countries have some gaps in compliance with global standards and codes. It may be useful, however, to note as well that Argentina--even after bankruptcy of record proportions--ranks 33rd out of 83 while Brazil ranks 48th. Further distinguishing the assessment, Argentina scored 39.23 out of 100; Brazil scored 27.69 out of 100.

Scores and ranks for these countries suggest that risks from compliance with the global financial architecture may be an additional and unique screen for assessing country risk and, most importantly, for pricing the terms of exposures in these jurisdictions.

Other examples highlight risk assessment complexities among the more industrially developed countries. There is no country among the 83 states that scores a perfect 100. The United States does score highest, ranking first with a numeric index of 83.08 out of 100. There is useful business risk consideration, however, when the U.S. is compared with Canada, which ranked fifth but scored 19 points less at 64.62 out of 100. There are no arguments that both countries mostly comply with international standards and codes. Neither G-7 country posts perfect scores; both have recent evidence of problems with several principles among numerous specific standards.

Business risk mining in this analytical space might well turn up exploitable, competitive, and profitable insight for commercial returns. Similar suggestions are found in the reporting that France ranked 13th out of 83 with a score of 53.85 out of 100. The United Kingdom ranked fourth out of 83 with a score of 66.92; Germany ranked 20th out of 83 with a score of 47.99. eStandards Forum posts a numeric index of 70.00 out of 100 for Hungary and a ranking of third out of 83.

The Financial Standards Foundation believes that transparency is the force leading to proper risk discrimination and the ability to assign fair and market-clearing prices for businesses conducted increasingly on a global platform. The eStandards Forum Web site offers a timely and novel approach to global architecture assessments focused on financial sector reform and the best practices of the private sector. There are power and leverage in the risk management function--an influence that can be truly positive for world business behavior if practitioners are willing and able to follow the prescription for boosting business from global financial architecture. The risk manager's support of linking the private markets to country compliance with standards and codes of good behavior is the key requirement. It is also a mandate for leadership.