China & the US
Country Risk Reviews: presented at a Country Risk Committee simulation held at NYU’s Center for Global Affairs…
In “Country Risk Analysis and Management,” a class offered in the Global Economy concentration in the MSGA degree program at NYU’s Center for Global Affairs, we conduct a simulation of a corporate Country Risk Committee towards the end of the course.
Students make presentations on countries — recommending a “country risk category” and a “sovereign credit rating” — and put these recommendations before the Committee for discussion and a vote.
The professor, who chairs the Committee, also submits country recommendations. In April 2022, Professor Roger Scher submitted reports on China and the US to the Country Risk Committee. These Country Risk Reviews can be found on his website, Country Success, where a fuller report on the US is also available, titled “Ten Point Plan: Strategic Planning for the US,” written in 2020 with a co-author.
[When you go to the site, scroll down past the Ten Point Plan documents (past the report, Notes & Sources, and an earlier, longer draft of the report) until you find the PowerPoints (PDF-ed) on the US and China from April 2022.]
In addition to these countries presented by the professor, students this semester are presenting a broad selection of emerging and developed market countries, utilizing for their “deep dives”: IMF Article IV Staff Reports, rating agency methodologies, and other resources.
The Committee reviews these countries in order to update its country risk assessments on the “firm’s” largest exposures. The work of the Committee drives corporate risk appetite around the world.
Country Risk
Globalization of economic activity requires that firms operate in multiple sovereign jurisdictions and interact with sovereign governments. “Country Risk Analysis and Management” provides an introduction to country risk — the risk that firms incur in cross-border investment or lending. The course explores, from the practitioner’s perspective, how to analyze and manage cross-border exposures.
Clients, counterparties, joint venture partners, and supply chains can be found across numerous countries for many firms, both large and small. Hence, firms must assess and mitigate potential financial loss due to country events. Such events include coups, social unrest, war, and economic shocks, including adverse market developments and economic policy changes.
Sovereign credit risk, which is directly assessed by the global credit rating agencies (e.g. Standard & Poor’s, Fitch Ratings and Moody’s) in their sovereign ratings, is a sub-category of country risk. Sovereign credit risk reflects the ability and willingness of a sovereign government (such as the US federal government) to service its financial obligations on time and in full. We have learned that the sovereign government itself is often the key driver of country risk in a given jurisdiction.
Country risk analysis not only looks at sovereign credit risk, but also at the risk of capital controls, ESG risks, and risks to political stability. The goal of this course is to provide students with the tools necessary to assess country risk and prepare them for relevant jobs in the private and public sectors.
The class begins with lectures on methodology — drawing heavily on rating agency criteria. Guest lectures from practitioners in the field — at banks, other firms, and the government, in addition to the rating agencies — cover different firms’ approaches to country risk as well as numerous case studies.
Key “clinical” skills are developed in this class: macroeconomic and balance of payments analysis; domestic and international political risk assessment; analysis of government finances and banking sector risk; knowledge of the extensive resources available to the analyst; awareness of the regulatory environment; and, case study skills.
Country Risk Committee
In the last quarter of the course, students study in-depth an IMF Article IV Staff Report on a country, prepare a risk analysis, write a paper on the topic, and present their recommendations to the Country Risk Committee.
They recommend a country risk category — one of five risk levels — low, moderately low, medium, moderately high, and high risks — which drive the firm’s exposures. These 5 categories reflect the firm’s risk appetite across borders.
Students also recommend a foreign currency sovereign credit rating — on the standard rating agency 21-point scale (from AAA to default) — indicating the risk of non-payment of a sovereign government’s financial obligations to private creditors.
The US & China
It is timely to review the US. The Biden budget plan released last month may mean deficit-neutrality for Build Back Better, with a focus on the climate provisions and taxes on wealth. Likewise, it envisions an upward adjustment in the corporate tax rate that would still leave the US competitive with other countries.
Defense spending restraint, contained in the proposal, may not affect R&D spending on important future technologies such as AI. On the negative side, the budget will likely drop a key poverty-reduction provision — the child tax credit.
The review of the US addresses the country’s rising negative investment position, reflecting decades of borrowing abroad — though recently this deterioration has been due in large part to higher US equity prices, which flatter non-resident equity claims.
Finally, while the US review highlights America’s formidable strengths from a risk standpoint, directional issues raise warning lights — i.e. deteriorating trends in education and social outcomes, governance and debt dynamics.
2022 promises to be an eventful year for China.
The 20th Party Congress will convene this Fall and is expected to reappoint Xi Jinping as president, as well as to feature other key party and government leaders (and potential successors) who will sit on the Politburo Standing Committee.
Also, this year should shed light on:
- how damaging (or well-handled) the crisis in real estate will be;
- whether COVID-related lockdowns like the painful one in Shanghai will continue;
- if the Joint Statement issued by the Kremlin following the summit between Messrs. Xi and Putin at the Olympics will translate into an open alliance opposing US global leadership; and,
- if the slowdown in China’s economic growth will represent merely a pause in the country’s rise to becoming the world’s leading technological and economic power.
Have a look at the US and China presentations on the Country Success site.
