The added risk from international investments.
What is Country Risk?
Country risk refers to the uncertainty associated with investing in a particular country, precisely the degree to which that uncertainty could lead to losses for investors. This uncertainty can come from many factors, including political, economic, exchange-rate, or technological influences. In particular, country risk denotes that a foreign government will default on its bonds or other financial commitments increasing transfer risk. In a broader sense, country risk is the degree to which political and economic unrest affects the securities of issuers doing business in a particular country.
Understanding Country Risk
Country risk is critical to consider when investing in less-developed nations. To the degree that factors such as political instability can affect the investments in a given country, these risks are elevated because of the great turmoil created in financial markets. Such country risk can reduce the expected return on investment (ROI) of securities issued in such countries or companies doing business in such countries.
Investors may protect against some country risks, like exchange-rate risk, by hedging, but other risks, like political instability, do not always have an effective hedge. Thus, when analysts look at sovereign debt, they will examine the business fundamentals—what is happening in politics, economics, general health of the society, and so forth—of the country that is issuing the debt. Foreign direct investment—those not made through a regulated market or exchange—and longer-term investments face the most significant potential for country risk.