Country Risk Analysis

Country Risk Analysis 7

CountryRisk Analysis

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As an investor, it is very important to assess the viability of thebusiness in the domestic and international market. The decision toinvest in a foreign country starts by analyzing the country’sriskiness in terms of the investment climate. The factors to evaluatethe riskiness include political, economic and the risks of doingbusiness. These factors should be analyzed comprehensively to preventthe business from unexpected losses due to poor investment in eitherdomestically or internationally (Ramady, 2014). Every country has itsunique risks that affect various kinds of investments, especially inbusiness-related fields.

As a manager in a multinational company, it is important to determinethe riskiness of a business in every country that you hope to investin. This is because every country has its riskiness in terms ofeconomic, business and political risks. Setting up a business in aparticular country without determining the riskiness of that countryleaves the business to remain in the state of uncertainty. The GCCcountries especially UAE have met a major progress in the area ofbusiness over the past two decades. This has enabled UAE to emergingas an important player in the global business arena both economicallyand politically. The rapid increase in economic growth has beenaccelerated by a steady demand for oil and has been supplemented bythe way many non-oil sectors have shown interest in the sector ofbusiness (Ayyub, 2014).

As a Business Development Executive of a Multinational company, Iwill conduct a (CRA) for four countries mostlyfrom the GCC countries. Due to the increasing global nature of thebusiness, it is important for business entities to carry on a CRA,which is important for making policies of whether to invest, or not.Many researchers have ignored have ignored carrying a country riskfor GCC countries because they assume that they have a one type ofeconomy (gas and oil) with the similar financial, economic, andpolitical aspects (Jonathan 2006). As a policymaker, it is good notto assume that all countries have the same type of factors thataffect an operation of the business. Many policy analysts have failedto provide the best business environment for their venturesespecially companies that have multinational operations. The policyanalysts rarely analyze the political risks of the GCC countries, butthey only use the Kingdom of Saudi Arabia as the central focus torepresent all the countries in the GCC. This neglects the attempts toexplore the source of Composite Risk (CR) in the GCC and itssubcomponents of financial risk (FR), economic risk (ER) andpolitical risk (PR). Failure to analyze the above factors will give amultinational company false impression making it operate underconditions of uncertainty (El-Sayegh, 2008).

Theunclear CRA of GCC stimulates most of the domestic capital by thelocal companies to be allocated to other countries that are outsidethe GCC region. This paper, therefore, is going to discuss some ofthe policy issues required to be addressed when setting amultinational business in for different countries mostly found in theGCC region. The people are going to give the suggestion concerningwhether the UAE based company should invest its businesses in thefour companies where their CRA have been determined in the paper ornot. The paper will also suggest some of the risks such as economic,political and financial that a company will encounter in thosecountries. Apart of the mention risks, the paper will also analyzecultural prospects, legal systems, investment environment, ethicalpractices and stability of the country Hassan (Al-Tamimi, &ampMohammed Al-Mazrooei, 2007). The reason for conducting such kind ofanalysis as a Business Development Executive or a policy analyst isto provide the company with appropriate measures of whether or not toinvest in the regions under the study.

Thereport will also provide the readers with the PESTLE analysis of UAEto represent some of the countries under the study. The analysis isimportant to the business as it helps the business to make majorstrategic and corporate decisions of investing in differentcountries. The company will only invest in the countries with thefavorable business environment and those with the unfavorablebusiness environment will be avoided (Ramady, 2014).

ExecutiveSummary

Everycountry has its unique risks that affect various kinds ofinvestments, especially in business-related fields. The paperanalyzes the country’s risk, which is very important when amultinational company wants to invest in a foreign company. Thepolitical, economic and financial risks in UAE are very stable. Thisindicates that is the best environment for a foreign company toinvest in. the condition in Kuwait is similar to that of UAE andtherefore as a policy analyst, you should invest in Kuwait. Thestable condition in Kuwait is favorable for the growth of business.The business environment is stable in Bahrain but unstable in Oman.This indicates why a policy analyst should advocate for its companyto operate in the former three countries and leave out Oman.

CountryCritical Analysis

UAECountry Risk Assessment

Sovereignrisk

Thecurrent Sovereign risk of UAE is stable. The country can meet itsdebt obligation due to the presence of vast oil reserves. The countryalso boasts of very large foreign holdings that are important inproviding the country with taxes to help in improving the country’seconomy. Revenues collected from the foreign holdings are then usedto improve different sectors of the country such as infrastructure.For a business to operate effectively, the infrastructure should bewell developed such as roads, rail, air, and ports. As a policy makeror analyst, I prefer investing in a country like UAE than thecountries with unstable sovereign status. Unstable economic andmarket conditions may have very serious and adverse impact on thebusiness and, therefore, a rational businessperson will chooseworking in the country with stable market and economic factors(Grosse, &amp Trevino, 1996). Unstable conditions will deterioratethe credit markets and current equity making the operation of thebusiness to be very expensive. The business may end up sufferinglosses throughout its operation in such countries. The businessstrategy is affected by the increased economic downturns and,therefore, a rational manager has to examine the conditions that arefavorable for the business before investing in any particularcountry. All the above aspects are positive for the case of UAE, andtherefore it is important that a business invest in UAE due to thehigh possibility of growth in future (Aswathappa, 2010).

Currencyrisk

Thecurrency of UAE against the dollar and the pound is stable. Theauthorities of UAE are committed to ensuring that the country’scurrency peg. The authorities work hard to ensure that the US dollarvolatility is controlled and weighed every time about the localcurrency. The UAE’s withdrawal from the proposed GCC currency hasnot affected the country’s currency and, therefore, this has notaffected the rating of the currency. It is the wish of any company tooperate in countries that have a stable currency compared to thosethat have unstable currency. A business that deals with importationand exportation of goods or services should consider protectingitself from the changes in the exchange rate. The company will beaffected negatively by the instability of the currency. As a BusinessDevelopment Executive of this multinational company, I will investheavily in UAE due to the positive conditions for the business(Cordesman, &amp Rodhan, 2006).

Politicalrisk

The domestic political arena of UAE is stable. The company’sdecisions will not be affected by the politics or harsh policymaking.The company can make its policies in UAE without facing oppositionfrom the government. These positive political factors are ideal forthe operation of the business in UAE. As a policy make I willadvocate for the company to invest heavily in UAE due to conducivepolitical factors that are healthy for the operation of the business(Al-Tamimi, 2002).

EconomicStructure Risk

The state of the economy in UAE is stable and, therefore, the foreignassets will continue supporting the economy. The high investment inthe foreign assets holding supports the country’s economy to alarge extent. It is therefore for a company willing to invest inother countries to examine the economic arena of that particularcountry. When the conditions turn out to be stable, the companyshould go ahead and make investments but when the conditions are theother way round, it is advisable that no investments should be made(Ramady, 2014).

KuwaitCountry Risk Assessment

KuwaitCountry Risk Assessment

EconomicStructure Risk

Kuwait as a country is an oil-rich state. The economy is stable asit is driven by oil-related business operations. Countries that arerich in oil have the economies that are stable than those that onlyrelies in the sectors like agriculture. The stability of theKuwaiti’s economy is very important in the operation of thebusiness. As a policy maker of the company, I will suggest thecompany to operate in Kuwait. The country has a well-establishedinfrastructure that eases transportation of goods and services. Thedeveloped infrastructure is ideal for the operation of the businesssince many businesses have operations that involve mostlytransportation of goods and services (Al-Tamimi, &amp MohammedAl-Mazrooei, 2007),

Kuwait’sGDP the country

Thepolitical system of Kuwait is stable. The constitution of the countrydoes not allow the formation of political parties. This makes thecondition favorable for a business operation in the country. There isthe freedom to travel, drive and pursue business in Kuwait.Therefore, the country’s state is ideal for foreign investment. Arational policy analyst will select the country with an idealbusiness environment for the better operation of the business and tofacilitate the expansion ability of the business in that particularcountry. I will select Kuwait as one of the destinies to operate in.The rate of corruption in Kuwait is moderate, and this is quiteremarkable as when compared to other countries that have high ratesof corruption reported daily (Ayyub, 2014).

Currencyrisk

Thestate of Dinar is stable when compared to the dollar. Every businesswill want to operate in countries with the stability of the currency.The country has authorities responsible to control the stability ofthe currency in the financial market. The stability of the Dinarmakes it suitable for a company to set a business in Kuwait(Al-Tamimi, &amp Mohammed Al-Mazrooei, 2007).This is because the importation and exportation activities of abusiness rely on the stability of the local currency against thedollar. A rational manager will select Kuwait as the best destinationto invest in because of the positive conditions that support themajor business operations.

BahrainCountry Risk Assessment

Politicalrisk

The country is a safe place to conduct foreign businesses. However,the country has faced some political upheaval from 2011. Thesepolitical upheavals are not ideal for the operations of the business.Although the upheavals may not target the foreign investors, they arebig threats to businesses. A good business should operate in a stablebusiness environment and not in the unstable business environment.Even employees prefer working in areas with the stable politicalenvironment than those that encounter political unrests almost allthe time. Instead of the workers working in the companies, they willbe taking most of their time participating in the political unrests.As a political analyst, I should, therefore, recommend for thecompany not to invest its business in Bahrain due to the abovereasons (Hasan, &amp Dridi, 2010). The political turmoil in thecountry are not positive for the operation of the business andtherefore as a Development Business Executive I will advise thecompany to take precautions and avoid invest in a country likeBahrain. Risking to invest in such kind of a country can lead to thecollapse of the business and therefore at the end hindering thegrowth of the business in other countries.

EconomicRisk Assessment of Bahrain

Bahrain same as the other GCC countries has its economy dominated bythe oil sector. Other sectors of the government account for more thanthree-quarters of the country’s GDP while the remaining sectorcomprises of the oil sector. The country was affected by thefinancial crisis resulting from the US in 2008. This led to theslowdown of the country’s economy that affected the non-sectoreconomy (Ayyub, 2014). The current state of economy is stable andfavorable to the operations of business. As a policy analyst for thecompany, I will advocate that the company operate its multinationalbusiness in Bahrain due to the effective business environment thatsupports business growth in the country.

Currencyrisk

Bahrain maintains its currency peg against the US dollar even thoughthe oil sector realizes a lower level of income from oil. The countryreceives financial support from the neighboring country to maintainthe stability if its currency against the foreign currency. Thecountry has not done a lot in ensuring that the currency is stableagainst the dollar. This implies that the currency of Bahrain keepsfluctuating with time.

SovereignRisk

The sovereign risk of the country is constrained by the highpolitical tension in the country. There are lower levels of financialflexibility than the levels are in other oil importing countries inthe GCC region. The prices of the commodities change with timedepending on the condition of the economy and the level ofcompetition in the oil market. This makes it difficult formultinational companies to operate in this region. Every businessprefers operating in a country that has a stable, sovereign riskscore. This shows why I will advise the managers to cease theoperations of the firm in Bahrain (Ayyub, 2014).

OmanCountry Risk Assessment

EconomicRisk Analysis

The prospects of the economy in Oman appear favorable or theoperation of the business. The country’s GDP increases as timeprogresses by. The Investor confidence in the government of Bahrainis reflected by high consumption for the government`s bond at apercentage of more than 200%. This implies that the investors havehigh confidence in the country’s economic stability. As a policymaker of the company, I will encourage the company to invest itsbusinesses in Oman due to the stability of the economy. The country’sdebt restructuring offer has an acceptance level of more than 66%.This is high enough to eliminate legal obstacles to enable thecountry borrow in the international capital markets (Al-Tamimi, &ampMohammed Al-Mazrooei, 2007).

Politicalrisk of Oman

The political state of the Oman currently is stable as compared tosome few years back when the citizens were protesting for employmentopportunities to be created. The government solved the issue bycreating more than 36000 jobs in the year 2012. The political statehas continued to remain stable from that period up to the currenttime. Despite the fact, the opposition in the Oman government hastaken hold of a narrow section of the Congress the oppositionremains weak implying that the state of the political environment isstable.

PESTLEAnalysis

The UAE has realized steady developments over the past two decades toemerge as an important world player in both the economic andpolitical arena. The country maintains its active diplomaticrelationship with more than 60 countries in the world especially inthe GCC and MENA regions. The country is considered as one of theleading countries in terms of political forces in the Middle East(Hasan, &amp Dridi, 2010).

PoliticalAnalysis

The government of UAE is considered to have a systematicpolicymaking agenda. The country is the first one in the GCC regionto have conducted partial elections in the area. The absence ofdemocratic government institutions poses many challenges to thegovernment.

Analysisof the political landscape

Strengths

  • Strong implementation of policies

Weaknesses

  • Lack of democratic institution. No democracy in the country.

Futureprospects

  • Improving relations with other foreign countries

Futurerisks

  • Weak relations with Iran the fragile relationship between these two countries may lead to wars in the region, which may be worse in the region. The accelerating factor is the signing of the nuclear deal with US. UAE has for some time taken a low-major approach to the issue raising the level of risk in terms of its relationship with Iran (Hasan, &amp Dridi, 2010).

EconomicAnalysis

Strengths

HighPercapita Income: thecountry has high Percapita incomeand the income is expected to increase as time progresses by. This isbecause of the fact that as time moves, the level of technology andinvestments increases therefore leading to an increase of Percapitaincome too.

Strongsurplus of trade: the countryhas maintained a strong surplus of trade for several years. Thisindicates the strength of the country to export more of its commodityand services in the foreign market.

High-qualityinfrastructure: Theinfrastructural network of the country is advanced and the country isranked as the sixth country in the world with quality infrastructure.Advanced infrastructure supports the operations of the businesses inthe UAE.

Weakness

Highdependence on oil revenues: Mostof the countries operations and sectors rely heavily on one sectorfor financial support. This is risky and therefore the country issupposed to diversify its dependability to other sectors of economy.

SocialAnalysis

Strengths:Low literacy rate

Weakness:Low expenditure in the sectorof education

Futureprospects: Increased use of ITin the healthcare facilities

FutureRisks: Unemployment rate in thecountry are projected to increase.

TechnologicalAnalysis

Strengths:Rapid growth in the sector oftelecommunication

Weaknesses:Poor education in terms ofscience. There is little investment in scientific research by thegovernment thereby limiting the amount of the country’s innovations(Hasan, &amp Dridi, 2010).

Conclusion

Asa policy analyst for a multinational company that aims to operateinternationally in a foreign country, it is good to determine andcarry out a proper CRA and PESTLE analysis before making investments.The company should analyze economic, political, financial,technological, cultural or sociological aspects since they are theones that affect the effectiveness of business operations. Countrieswith any of the above factors that are unstable should not beinvested in, but only those with stable factors should attract thecompanies.

ReferenceList

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