Abstract
The purpose of this study is to carry out risk analysis in a country and determine the best way to manage the risk. The country of consideration in this case is Turkey. As a country, Turkey is in between Middle East and Europe and has mixed culture between the inhabitants. The paper seeks to address the various investment risks that exist in a country and how the risk factors in the country can be measured. The paper will also incorporate management of the risk factors that will be determined.
Introduction
Carrying out risk analysis comes about due to the issue of having different impositions and restrictions of payment in various countries. Moreover, the capability of payment by the debtor is usually affected by macro-economic instabilities that may be in existence, which are caused by constrains in the commercial environment. The main cause of presence of this uncertainty can be traced back to globalization, which has brought about another level of competition. Due to globalization, new companies are being attracted to the external market that has already been established to enjoy the huge business opportunities available in the world today. Stock and financial markets are also being affected by globalization. In turn, they have come out as sophisticated markets as new products are being revealed in the market (International Monetary Fund, 2000). The financial markets have become linked up and sharing of information has become more efficient and faster. In turn, all sectors, investors’ banks and companies have resulted to an improvement in return on their assets. Though this is desirable in so many countries, some countries do not enjoy an increase in their return on investment. To them, it is an additional risk that results and there is need to assess any business decision made. Due to complexity in decision making, macro-economic stabilities have resulted in some countries like Argentina and Turkey.
Literature review
History of country risk analysis
For a long time, the risk that is in existence between countries has been an issue among various economies. Transactions that include individuals of different countries have had issues due to the possibility of lack of performance between these countries. 1970’s saw presence of liquidity being in existence in the world due to recycling of money that was caused by trading by OPEC members. In turn, this money was placed in reserves in international banking. During this time, banking was undeveloped and that led to banks enhancing their services so as to handle this money, as they could not handle the countries’ risk. Later in the eighties, there existed payback problems that were brought about due to lack of credit procedures between the countries and the borrowers. The resultant of this was countries being affected by credits, and losses were reported in the international banks. Presence of losses leads to financial institutions to adopt risk exposure policies, analytical methods and effective credit procedures.
Data used
The analyst who is carrying out the analysis need to have different types of data to be able to come up with the analysis needed. For one, the public offices need to be transparent on the information that they may have, and their disclosure method should be strong. Data will also be obtained from other sources like the World Bank, International Monetary Fund, and International Development Bank among others (Emerging Europe Monitor, 2011). Another way data may be obtained in this scenario is by use of rating agencies who analysis data from different countries.
Rating agencies
Apart from the above mentioned institutions, there are also other agencies that may be of assistance in getting information about the country. An example of the same is the Control Risk Information Services, AMB country risk report and political risks services. Information got from all these institutions is also important and need to be incorporated in analyzing the risk of any country. These agencies are used all over the world and divide countries according to the level the countries are able to achieve. Using the bond issue, these agencies form opinions using demotions like high moderate or low in their reports to investors. The opinions raised about the data got carry so much controversy. However, it is always necessary to have these evaluations as they are useful and necessary to investors (Ribeiro, 2004). They provide an organized piece of data, which shows the ratings of various countries of the world.
Methodology used
The methodology used in this study is an analytical study. The study will assess the various categories of risk in existence in the country to try to determine the risks that affect the country. The analysis in this case will accord the various sectors of the economy that will include economic, social and political risks, which may be in existence in the country. Analysis will be carried out using models using statistics. The major components of the economy, political risk, financial risk and the economic risk will be analyzed through this model (Sachs, 2001). Though the political risk is not measurable, the other risks will be measured so as to determine the range the country is in. The importance of analyzing the political scenario is important, as the decision that the government makes are very much influential on the economy and financial relations. However, it is notable that there exists a difficulty in analyzing the data got as prediction of the risk that occurs in cross border is very hard. The same may be said on the financial investments as the market volatility renders it unstable. Furthermore, there are new emerging markets that do not have easy history of the market price of the bonds. One of such models used in the analysis of the country risk is the Goldman Sachs model. The model breaks down the causes of risk in countries to various components. First to global drivers; this driver compares the risk amongst high valued credits. It also focuses on the price of the commodities in the market. The other component of the model is the domestic drivers. For one, this component focuses on the imports, the debts and the exports in the country. It also incorporates GDP in its analysis. The other portion of domestic driver focuses on the income statement. The analysis on the growth of the GDP is also incorporated in this stage. The final step when using this model entails simulation of the variables to be able to predict the behavior that will be exhibited by them in the future.
Data obtained
According to county risk tier, similar to the neighbor’s Turkey has a notable high level of both financial and political risk (both CR-4). However, there is a difference when it comes to the economic risk; the risk obtained was moderate CR-3. Year 2009 saw the country have a very sharp decline in terms of economic growth as it went down by 5%. However, the recent years has seen an increase in the GDP of 5% growth in year 2011 (A.M. Best Company, 2011). Though inflation has also been high in this county, year 2011 has experienced a decline, but it is still high at 6%.
Kurdish community which the majority of people in Turkey, has internal tolerance with the neighboring society among them however, the same cannot be said when it comes to the external relations. Conflict has been common with external relations which results to political and economic stability.Turkey may have passed anti- fraud laws but corruption there is in it highest. In fact corruption and fraud has an average of twice the world’s corruption. Both internal and external fraud is high. Some companies have notably been involved in tax evasion by forensic accountants. Ethnic tension has also been evident in Turkey. The Kurdish rebels have been involved in causing political disability. In turn this has gone on record o ruin the reputation of the country and subsequently political instability. The instability further ruins the economy of the country as investors feel their investment may perform badly in this kind of climate. Religious tension is also in existence in the region. For one there are people of mixed religion and at times the tension is inexistence. Islam is a major religion and there has been tension with other religions in the country. The resultant of this is economic instability in the country. As noted, democratic accountability is also not at its best in Turkey. In turn this results to a scenario where there is poor bureaucracy and management in the government. Having this scenario leads to a state of poor governances and instability in the economy.
Discussion and data analysis
Economically, Turkey finds its bases on agriculture and light manufacturing industries. The main industries in this case are the textile and the clothing industry. The main cause of the industries to be moderate in growth may be due to the fact that the country has a weak banking system. The country has also gone on record to having deficits in the current accounts that are notably very large. To add on that, the country lacks structural reforms, which are very helpful in minimizing economic risks. Though the economic growth reached a high of 8.2% in year 2010, the same decelerated in year 2011 with a growth of about 4.6%. However, though there may be a decline, the economy is still experiencing a very strong recovery. Controlling the current accounts of the country and ensuring that the debt deficit is kept at a minimum would be a good way to ensure that there is improvement economically. Apart from that, there needs to be reforms that need to be carried out to ensure that they aim at improving the economy, and ensure that there is continuous growth.
Political risk in Turkey is conceivably high. The country is situated in Middle East and its population comprises both eastern and western cultures. In the recent past, the country has been in the search for the European Union membership. However, this might not happen in the near future as there is a very big opposition from the members. The main cause of perception of high political risk and the negative attempt to the lack of acceptance in the European Union may be attributed to several reasons. One of such reasons is the way the country treats Cyprus and the unknown status of Cyprus. In bid to bring about improvement in this sort of risk, the government of Turkey needs to be actively involved to achieve success in this sort of risk (Federation of trade Association, 2006). For one, once and for all the issue of Cyprus needs to be resolved. Resolving it would reduce the scare that may worry off willing investors, who fail to invest due to political uncertainty.
Finally, as it was earlier noted, the financial system risk which is in existence in Turkey is weak. The primary regulator of Turkey is the insurance supervisory bond. The last five years have seen the improvement of the existing financial systems in the bid to reach the European standards. The other reason that leads to the analyst’s conclusion of Turkey having risky financial system is the fact that the country has small capital markets. However, it is notable that even amidst the financial crises that have hit the globe, Turkey’s banking system handled it quite well. A big capital market may be a good solution to improving the financial system in Turkey. However, care also need to be taken since if it may become so big that it might be uncontrollable and that may lead to such effects like the one experienced in global crunch.
Conclusion
To sum it up, there is moderate improvement in the economic capability of Turkey. There is also improvement in the credit risk. The improvement can be attributed by the fact that there is reduction of lending by state owned banks, which were previously performing poorly. To add on that, the improvement in the economic stability can be attributed to the new regulations that have been put in place by the government. According to Banking Industry Country Risk Assessment (BICRA), in a scale of 1-10 with 1 being the strongest and 7 been the weakest, Turkey had a scale of 7 (Reuters, 2010. It was an improvement from the previous 8 in the last year. The economy of Turkey is also shown to be vulnerable in case there is any devaluation of Turkish currency. The reason behind this is due to the fact that the country has adopted an open currency policy that also applies to other foreign currency. The analysis on the data is clear to show that turkey is not performing its best as far as the risks are concerned. The reasoning behind this is backed by the facts that are the determinants used to determine the risk analysis of the country are either weak are moderate. Investing in this country would therefore be risky as there is a lot of instability in the country.
Areas of further research
A further research may be carried out to determine the ways of improving the existence of moderate financial crises in Turkey. A study on why Turkey banking system was not affected by the global credit crunch can also be done.
List of References
A.M. Best Company, 2011. Turkey. Pp 2-3.
Emerging Europe Monitor, 2011. Turkey. Web.
Federation of trade Association. (2006). Turkey — Our Featured Country. Web.
International. Monetary Fund. (2000). Globalization: Threat. Pp 6-8.
Reuters. (2010). TEXT-S&P revises Turkey Banking ind country risk assessment. Web.
Ribeiro, R. D., 2004. Country Risk Analysis. Pp 6 -13.
Sachs, G., 2001. Global Emerging Markets. Portfolio Strategy. Pp 6-13.