ABSTRACT
The requirements of country-risk analysis are two-fold: to consider a country as a credit risk on its own merits and to measure the risk of lending to it vis-á-vis other sovereign candidates. The conceptual framework for evaluating country risk varies widely among banks. Nevertheless, two broad approaches can be discerned: a qualitative analysis which involves an in-depth political and economic assessment of a country; and a quantitative analysis which seeks to identify certain key variables common to every country, in order to rank all countries according to their perceived importance. In some cases a fully qualitative analysis may be prepared which could be very comprehensive. However, this approach can be very ad hoc in nature and less useful than the structured qualitative report which is written along well-defined lines and presented in a standard format. The qualitative approach may take the form of a checklist embodying quantifiable variables which are combined to produce one composite series, ranking sovereign borrowers. The use of a more rigorous methodology involving the application of econometric techniques to observed statistical phenomena is also possible. In practise most banks employ the structured qualitative analysis in conjunction with a weighted checklist.
