5.9 Portfolio investment regulation and risk
See Table 5.9 hereAbout the data
Definitions
Data sources
As investment portfolios become increasingly global, both investors and governments seeking to attract foreign investment must have a good understanding of country risk. This table presents information on country risk and creditworthiness from several major international rating services.
The information on the regulation of entry to and exit from stock markets is reported by the International Finance Corporation (IFC) for emerging markets only. In many economies certain industries are considered strategic and are not open to foreign or nonresident investors. Or the level of foreign investment in a company or in certain classes of stocks may be limited by national law or corporate policy. The regulations summarized in the table refer to "new money" investment by foreign institutions; other regulations may apply to capital invested through debt conversion schemes or to capital from other sources. The regulations shown here are formal ones. But even formal regulations may have quite different effects in different countries because of the prevailing bureaucratic culture, the speed with which applications are processed, and the density of red tape. The effect of entry and exit regulations may also be influenced by graft and corruption, which are impossible to quantify.
Risk ratings may be highly subjective, reflecting external perceptions that do not always capture the actual situation in a country. But these subjective perceptions are the reality that policymakers face in the climate they create for foreign private inflows.
Risk ratings are usually numerical or alphabetical. For numerical ratings, the higher the number, the lower the risk. For alphabetical ratings, the closer to the beginning of the alphabet, the lower the risk. Readers should refer to the original sources for more details on the rating processes of the rating agencies. Countries not rated by credit risk rating agencies typically do not attract private flows.
The International Country Risk Guide (ICRG) collects information on 24 components of risk and converts it into numerical risk assessments. The ratings represent a very broad measure of political, economic, and financial risk. Ratings below 50 are considered very high risk, and those above 85 very low risk.
Institutional Investor country credit ratings are based on information provided by leading international banks. Responses are weighted using a formula that gives more importance to those from banks with greater worldwide exposure and more sophisticated country analysis systems. Countries are graded on a scale of zero to 100, and ratings are updated every six months.
Euromoney country creditworthiness ratings are based on analytical, credit, and market indicators. The ratings are based on polls of economists and political analysts supplemented by quantitative data such as debt ratios and access to capital markets. The ratings are on a scale of zero to 100.
Ratings of sovereign foreign and domestic currency debt by Moody's Investors Service are presented for obligations that extend longer than one year. These long-term ratings measure total expected credit loss over the life of the security; they are not intended to measure other risks in fixed income investment, such as market risk. Moody's uses a multidisciplinary, or "universal," approach to risk analysis, designed to take into account all relevant risk factors and viewpoints.
The ratings by Standard & Poor's of sovereign long-term foreign and domestic currency are based on current information furnished by the issuer or obtained by Standard & Poor's from other sources it considers reliable. The ratings are based on several risk factors such as the likelihood of default and the capacity and willingness of the debtor to make timely payments of interest and repayments of principal in accordance with the terms of the obligation. The ratings measure the creditworthiness of the debtor and do not take into account exchange-related uncertainties for foreign currency debt.
Definitions
• Regulations on entry into emerging stock markets are evaluated using the following terms: free (no significant restrictions), relatively free (some registration procedures required to ensure repatriation rights), special classes (foreigners restricted to certain classes of stocks designated for foreign investors), authorized investors only (only approved foreign investors may buy stocks), closed (closed or access severely restricted, as for nonresident nationals only).
• Regulations on repatriation of income (dividends, interest, and realized capital gains) and repatriation of capital from emerging markets are evaluated as free (repatriation done routinely) or restricted (requires registration with or permission of a government agency that may restrict the timing of exchange release).
• Composite International Country Risk Guide (ICRG) risk rating is an overall index based on 24 components of risk grouped into three major categories: political, financial, and economic.
• Institutional Investor credit rating ranks the chances of a country's default from zero to 100.
• Euromoney country creditworthiness rating is a measure of the riskiness of investing in an economy. Ratings are on a scale of zero to 100; the higher the number, the lower the risk.
• Moody's sovereign foreign and domestic currency long-term debt rating assesses the risk of lending to governments. Aaa bonds are judged to be of the best quality, Aa bonds of high quality, and C bonds of the lowest quality. Numerical modifiers 1–3 are applied to classifications from Aa to B, with 1 indicating that the obligation ranks at the higher end of its generic rating category.
• Standard & Poor's foreign and domestic currency sovereign long-term debt ratings are categorized as investment grade (AAA through BBB) and speculative grade (BB through C). Ratings from AA to CCC may be modified by the addition of a plus (+) or minus (-) sign to show relative standing within the rating category.
Data covering emerging stock markets' entry and exit regulations are from the IFC's Emerging Stock Markets Factbook 1996. Information on country risk and creditworthiness are from several sources: Political Risk Services' monthly International Country Risk Guide; the monthly publication Institutional Investor; the monthly publication Euromoney; Moody's Investors Service's Sovereign, Subnational and Sovereign-Guaranteed Issuers; and Standard & Poor's Sovereign List in Credit Week.
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