International Demand and Country Risk Analysis
The Fondazione Eni Enrico Mattei series on Economics, the Environment and Sustainable Development
Chapter 7: Modelling Country Risk and Volatility in Small Island Tourism Economies
7.1 INTRODUCTION Country risk refers broadly to the likelihood that a sovereign state or borrower from a particular country may be unable and/or unwilling to fulfil their obligations towards one or more foreign lenders and/or investors (Krayenbuehl, 1985). The Third World debt crisis in the early 1980s, political changes resulting from the end of the Cold War, the implementation of market-oriented economic and financial reforms in Eastern Europe, the East Asian and Latin American crises that have occurred since 1997, and the tumultuous events flowing from 11 September, 2001 indicate that the risks associated with engaging in international relations have increased substantially. Such risks have become more difficult to analyse and predict for decision makers in the economic, financial and political sectors (for further details, see Hoti and McAleer, 2005a). A primary function of country risk assessment is to anticipate the possibility of debt repudiation, default or delays in payment by sovereign borrowers (Burton and Inoue, 1985). There are three major components of country risk, namely economic, financial and political risk. The country risk literature holds that economic, financial and political risks affect each other. Country risk assessment evaluates economic, financial and political factors, and their interactions in determining the risk associated with a particular country. Perceptions of the determinants of country risk are important because they affect both the supply and cost of international capital flows (Brewer and Rivoli, 1990). The importance of country risk analysis is underscored by the existence of several prominent country risk rating agencies. Over...
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