Offshore

economic output from iron ore, a drop in the price of iron ore will cause pain not only for mining companies but also for retailers, restaurants and consumer product companies in the country. The United Nations Conference on Trade and Development (UNCTAD)…

organizations convened by the World Resources Institute. This institute measure climate change exposure with a climate risk index (CRI), measuring the extent to which countries have been affected by extreme weather events (meteorological, hydrological, and climatological), and their most recent measures (from 2021, with an update expected late in 2024) of global exposure to climate risk is in the figure below:

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Climate Risk Index (CRI) in 2021: ResourceWatch

Note that higher scores on the index indicate more exposure to country risk, and much of Africa, Latin America and Asia are exposed. In fact, since this map was last updated in 2021, it is conceivable that climate risk exposure has increased across the globe and that even the green regions are at risk of slipping away into dangerous territory.

Country Life Cycle - Measures

With that long lead in on the determinants of country risk, and the forces that can leave risk elevated, let us look at how best to measure country risk exposure. We will start with sovereign ratings, which are focused on country default risk, because they are the most widely used country risk proxies, before moving on to country risk scores, from public and private services, and closing with measures of risk premiums that equity investors in these countries should charge.

1. Sovereign Default Risk

The ratings agencies that rate corporate bonds for default risk also rate countries, with sovereign ratings, with countries with higher (lower) perceived default risk receiving lower (higher) ratings. I know that ratings agencies are viewed with skepticism, and much of that skepticism is deserved, but it is undeniable that ratings and default risk are closely tied, especially over longer periods. The figure below summarizes sovereign ratings from Moody's in July 2024

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Moody's Sovereign Ratings in July 2024; Source: Moody's

If you compare these ratings to those that I reported in my last update, a year ago, you will notice that the ratings are stagnant for most countries, and when there is change, it is small. That remains my pet peeve with the rating agencies, which is not that they are biased or even wrong, but that they are slow to react to changes on the ground. For those searching for an alternative, there is the sovereign credit default swap (CDS) market, where you can market assessments of default risk. The figure below summarizes the spreads for the roughly 80 countries, where they are available

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Sovereign [...]

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