Posted: November 19th, 2022

FNN 6210 SPRING COURSEWORK

ECONOMICS

FNN 6210 SPRING COURSEWORK

Objective: requires you to explain the basic elements of country risk analysis in terms of the economic, financial, political and social risks. Candidates will be required to evaluate the investment risks of a developed nation UK, Japan or Germany; and compare the risks to that to an emerging market Saudi Arabia, India and Brazil or a frontier market from Nigeria, Zambia and Vietnam.
The report should identify the key risks faced by each country, should be no longer than 2,500 words. Candidates will be required to present their report.

1. Country risk measures the potential adverse impact on an investors returns or a corporation’s cash flows of that country’s financial, socio-economic and political environment.
• For the two countries, break down the components of GDP and analyse the potential for growth.
• The potential to grow consumption.
• The ability to attract investment.
• Government policies to encourage growth, infrastructure development and ability to collect taxes. (15 marks)

2. Trade balance
• For the two countries, obtain a 10 year history of their balance of payments and plot the graph. Identify any trends or fluctuations in the balance of payments. Plot the graph of the chosen country against the US dollar over the same period.
(5 marks)

• For the last two years, identify the key exports and key imports and discuss the outlook for these key industries (for example; if the major exports are natural resources and the major imports are finished goods) the balance of payments will fluctuate with the price of natural resources. Highlight any over dependence on a single export or import. (5 marks)

• Discuss the currency exchange rate movements over the 10 year period to identify any correlation between the trade balance and the USD exchange rate. Consider any changes in the price of a key import or export on the balance of payments, such as the recent fall in energy prices. (10 marks)

• Discuss ways in which a government might seek to improve its balance of payments and the impacts of such policies on global trade. The answer should focus on central bank policies that influence exchange rates and government policies that foster economic development. (10 marks)

a.
3. Socio Economic and Political Risks
• Discuss the political risks associated with the chosen countries. (6 marks)

• Assess the overall socio-economic conditions of the two countries using the GINI co-efficient and other relevant measures. The answer should contain at least two policies from each country that are designed to promote a better socio-economic environment and comment on why such an outcome is desirable. (9 marks)

4. Credit Rating
• Discuss the credit rating of each of the countries sovereign bonds and research any default history. Highlight any future risks to the country’s ability to repay its obligations, based on current sovereign debt levels and future obligations. Candidates should consider the demographics of their chosen countries and the economic outlook. (10 marks)

5. Presentation
Candidates should evaluate their findings from the work done above and determine which country they would advise a client to invest in the following. The answers should be with regard to the evaluated risks and the potential returns.

• An investor in sovereign bonds (5marks)
• An investor in a private or publicly quoted company (debt or equity) (5marks)
• A corporation seeking to expand internationally (5marks)
• Outline the reasons why an investor might invest in both and how they would manage the risk (5marks).

Answers to question 5 must be presented in writing and in a presentation.
Important details
• To find the data you need, you should use the sources such as the CIA world Factbook.

• You should prepare your report in Microsoft Word or in another word processing software.

• You should submit your coursework electronically using the coursework submission system.

• You should present your models in a helpful and clear way.

• If you have any questions related to the coursework, please contact Charlie Dove-Edwin to set up a meeting in office hours..

Submission deadline: 20/11/2016 (midnight)

Word limit: 2500 words

Coursework Assessment Criteria
In preparing your coursework, you should be aware that you will be assessed by reference to the extent to which your answers meet the following criteria: Identification and application of knowledge to the question asked
Capacity to find data from online resources
Ability to apply theories related to the questions asked
Presentation of work in a clear and coherent way
Evidence of reading and research
Clear and accurate expression

Question one
In Europe, Germany has the largest national economy and of the nominal Gross Domestic Product (GDP) it’s the fourth largest in the world. The concept of social market economy forms the basis of the Germany economy model. In Germany the components that make up the GDP include; Gross national expenditure added to the External balance on goods and services. Other sub components include; final consumption expenditure, Gross capital formation, household final consumption expenditure, General government final consumption expenditure, Agriculture, Industry, Services among others. Since the mid – 1990s the country has been experiencing a relatively weak performance growth compared to other countries. The German economy has been showing a weak performance growth resulting in a decline in growth in the long – term (Mazzucato 2015).
Just like Germany, the components that make up the GDP include the Gross national expenditure and External balance on goods and services. On the contrary, Nigeria’s’ GDP has the potential of growth. This is likely to come from the benefits from growing global demand for resources, the spread of digital economy and rising demand from emerging economies. There geographic location is also advantageous that can enable them to trade easily with South and North America and Europe.
Germany has a potential to grow consumption, which will be driven by expenditure of consumers, based largely on the labor market , as the employment rate continue rising. The expenditure of the government is considerably expanded. While profits and wage development has enhanced the creation of jobs, direct taxes, boosted social contributions, covered social insurance and private consumption strong development has increased direct taxes. On the other hand Nigeria has a potential to grow consumption if she capitalizes on its strengths and place itself to benefit of rising worldwide trends. This is also strengthened by their rising economic and political stability.
Germany as a nation has the potential to attract new investors since it has a wide variety of resources of urbanized infrastructure which is easily available to foreign investors. The country is also strategically located at the center of the European continent which gives investors easy access to the whole European Union. The corruption levels are also very low. On the contrary Nigeria’s ability to attract new investment has been low due to its poor, enabling environment for business to attract Foreign direct investment (FDI). The country has also been hit by high levels of corruption and terrorist attack.
The German government has been encouraging growth and development by incr4reasing its public expenditure on infrastructure for example bridges and highways. They have also increased their ability to collect taxes by dividing the fiscal administration in two that is the state tax authorities and federal tax authorities. They also tax all income and does a tax return audit to detect tax evasion. In Nigeria the government has adopted both inward and outward looking strategies to encourage development and growth. The government has also increased its expenditure on infrastructure. They are also putting up strict measures to reduce corruption so as to increase their ability to collect taxes (Hausmann 2013).
Question 2
Trade Balance
German balance of payment between 2005 – 2015

Source: (World Bank 2015).

Between 2005 – 2007 the German trade balance was stable an increased consistently before dropping between 2007 – 2010 but later picked up and has been stable and increasing since then.

Nigeria balance of payment between 2005 – 2015

Source: (World Bank 2015).
Nigeria balance of payment has been fluctuating for the past ten years, but recorded a significant drop between 2013 – 2014
Nigeria performance against the dollar between 2005 – 2015

Source: (World Bank 2015).
The Naira performance against the dollar dropped between 2005 – 2008 but has been increasing steadily since then.

German main export is cars while its key import is crude petroleum. A fluctuation in the prices of cars and crude petroleum is likely to create disequilibrium in the balance of payment. While Nigeria’s’ main export is oil and natural gas while its main imports are manufactured goods. Just like Germany, its trade balance is affected by the prices of manufactured goods and natural gas and oil. Nigeria is over dependant on oil and natural gas as the chief exports.
Over the past years the euro has been performing differently between different nations. For instance, between 2005 – 2015 the euro depreciated by 8.4%. The German exchange rate was strong between 2007 to 2009 against nations like Iceland, Serbia and Turkey. The euro also performed well until 2007 when it started depreciating against reserve currencies such as the Swiss franc, the dollar and the Japanese Yen. There also exists a strong correlation between the USD exchange rate and trade balance in Germany. Whenever the USD exchange rate is high the trade balance is likely to be low while when the exchange rate is lower the trade balance will increase. When its main import (petroleum) prices went high the trade balance was reduced while whenever the price of cars goes up the trade balance increases. Just like the euro the Naira is fluctuating against other currencies. For instance, the Naira has been depreciated in the past ten years against the dollar. The significant one was in 2009 when the Naira depreciated to N170. Hence, the USD exchange rate has been affecting the trade balance. Whenever the USD exchange rate is high the trade balance is likely to be low while when the exchange rate is lower the trade balance will increase. Whenever the prices of oil and natural gas rises the trade balance also rises and vice versa.

A government may increase its balance of payment by adopting a tight monetary policy. The Central Bank of the country will increase the banking rate, which results for commercial banks charging higher lending rates. This will discourage borrowing from businessmen for investment purposes and consumer will not be borrowing to purchase durable goods. This will also reduce demand for imports. The government can also use contractionary fiscal policy measures such as increase indirect taxes, for example, income tax resulting in a decrease in aggregate expenditure. Another recommended policy is expenditure switching polices. This policy is also known as devaluation of the nation’s currency. Lastly, the country may exercise exchange control where exporters are required to submit their foreign exchange to the country central bank. Where it will be rationed amongst the licensed importers.

These policies also affect the global trade, for instance, a tight monetary will weaken the citizens’ ability to borrow and buy durable goods, hence nations exporting their durable goods to this country will record losses. Thereby slowing the global trade between the two countries. Contractionary policies will increase demand for local goods, making imports to lose market reducing the global trade. Devaluation is likely to increase a country’s export, hence increasing its global trade (Pollak 2013).

Question 3
Some of the political risks associated with investing in Germany include; civil disturbance, terrorism, war, adverse regulatory changes, breach of government contracts, capital controls and expropriation. These events can have a huge impact on the operations of any company and may also threaten the physical safety of employees. It is important also to note that the probabilities of occurrence of this risk are low. On the other hand, some of the political risk associated with investing in Nigeria include; terrorism, corruption, government policies among others. The nation has been in constant attack from Boro Haram paralyzing business in some cities. Corruption levels are also very high in Nigeria forcing a number of investors out of the country (Hemraj 2015).
.

In the past half century the income inequalities have risen continuously. The income of the richest is almost nine times that of the poor. The country has seen the rich getting richer and the poor becoming poorer. The need to address inequality has been catalyzed the economic crisis facing the country. In several societies the middle class is now expressing fears and uncertainty of exclusion and social decline. To create a better socio -economic environment the government has adopted policies to reduce on unemployment and measures to strengthen the public – sector investment and private sector investment. These measures will empower the poor hence giving them a chance to improve their living standards.
GINI coefficient shows a huge income inequality in Nigeria with the majority of people living in poverty and high rates of unemployment. For instance, different geopolitical areas in Nigeria have a disturbing wealth variation with the north living in better conditions compared to the south. This has also been fueled instability. To improve the socio – economic environment the government has adopted policies that encourage rural development, such giving incentives to investors in given areas. The government has also come with curb corruption so as to create employment for the youth. These policies are likely to reduce the gap between the rich and the poor, thereby creating a good socio – economic environment (Siebert 2014).

Question four
Credit Rating
Generally, a credit rating is applied by investors, pension funds and sovereign wealth funds, evaluate the credit worthiness of a country, hence can greatly impact on the borrowing costs of a nation. Germany Poor’s and Standard credit rating stands at AAA with an outlook that is stable. The country has not paid its debt since the war came to an end in 1945. The history of wealth and income of nations shows that Germany’s debt was 200% of its GDP but dropped to 20% of the GDP ten years later. Currently, the country is economically stable and there is no further risk on their ability to pay back its debts. However, the country faces demographic factors and the threat, even though low, of infectivity from a resurgent euro region liability crisis.

The credit rating for Nigeria Poor’s and Standard is at B with stable outlook. With the stable outlook the country’s fundamental credit will be favorable amongst its peers at B1 level, but faces a likelihood of further deterioration in the credit metrics due to shock in oil prices. The country has no past record of failing to its debts. But, the nation faces future risks of being caught in a debt trap. Currently, the country is accumulating arrears with no any observable option of paying back the borrowed funds apart from oil. The nation also has the lowest GDP ratio of tax in the world (Karayalçin & Mccollister 2005)
Question five
An investor interested in investing in sovereign bond should invest in Germany because the economy is stable and they are ruled by a transparent government. The rates of return will also be high since the inflation rates are low. Investing in Nigeria will not bring much return since the government is less transparent characterized by high corruption levels and the investments are done on areas that are unproductive. The high debt will lead economic instability eating up the rates of return to be expected by investors.
For an investor seeking to invest I a privately or publicly quoted company, I would advise that they invest in Germany. This is because unlike Nigeria, the country has a stable economy with a stable currency hence loses are minimized. While in Nigeria the currency is unstable and this will affect the stock prices, thereby increasing investors’ risk of losing.
For a corporation seeking to expand internationally I would encourage them to invest in Nigeria. As a developing economy the nation still has room for growth. The markets have not been fully exploited unlike Germany. The nation also has a high population which is likely to offer a new market. But, in Germany the market is stabilized and there are few opportunities which might be very competitive therefore, not providing a sure market.
An investor may also invest in both nations, for instance, one who invests in Germany is certain about the market return. This is because Germany is centrally located and the investor is able to access several nations in Europe. One would also invest in Nigeria due to the huge barrels of oil in the country which is in high demand around the world. Secondly, accessing Nigeria’s market is also easy. One way to minimize risk while investing in Nigeria is borrowing the government in foreign currencies. The other way is by insuring one’s business. Lastly, while investing in Germany one should ensure that they pay tax and do research on the product before making a decision (Barbash & Roye 2016).

References
BARBASH, B. P., & ROYE, P. F. (2016). Investment Management Institute, 2016.
HAUSMANN, R. (2013). The atlas of economic complexity: mapping paths to prosperity.
HEMRAJ, M. (2015). Credit rating agencies: self-regulation, statutory regulation and case law regulation in the United States and European Union. http://public.eblib.com/choice/publicfullrecord.aspx?p=2094788.
http://data.worldbank.org/indicator/BN.CAB.XOKA.CD?locations=DE
KARAYALÇIN, C., & MCCOLLISTER, K. (2005). INCOME DISTRIBUTION, SOVEREIGN DEBT, AND PUBLIC INVESTMENT. Economics & Politics. 17, 351-365.
MAZZUCATO, M. (2015). Entrepreneurial state: debunking public vs. private sector myths. London, Anthem Press. http://public.eblib.com/choice/publicfullrecord.aspx?p=4107798.
POLLAK, R. A. (2013). Nigeria: conditions, issues and U.S. relations. New York, Nova Publishers. http://public.eblib.com/choice/publicfullrecord.aspx?p=2194105.
SIEBERT, H. (2014). The German Economy Beyond the Social Market. PRINCETON; OXFORD, Princeton University Press.

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