Country Political Risk Contents

Abstract

For investors, domestic and international, the assessment of political risk is very important to decide whether to pursue investing or not in a particular market or country. Political risk can simply be defined as the risk of losing money due to unforeseen changes that may occur in a country’s government, policies, or regulatory environment. Changes or events are sometimes outside the control of governments such as acts of war, terrorism, or military coups, and which are extreme examples of political risk and can affect both advanced and developing countries. Others, such as expropriation of assets by the government, or merely the threat of such actions, can have a negative effect on investors. Once such an action has been taken by a government, it takes a long period of time before investor confidence can return. In early 2007, Venezuelan President Hugo Chavez abruptly announced plans to nationalize CANTV, the local phone company, and subsequent actions in the Venezuelan oil sector have left a lingering feeling of investor insecurity by foreigners, as did the nationalization of the Suez Canal in 1956 in Egypt until the era of liberalization of the Egyptian economy many years later. Political risk also comes in many other forms, which include new governments, a change in ruling parties, or an important piece of new legislation, with all these changes having a large impact on a country’s operating and economic environment, and thus positively or negatively affecting investor perceptions about a country’s prospects.

It is a good thing to learn caution by the misfortune of others.

Cyrus