- July 29, 2022
- Posted by: Ramkumar
- Category: Posts
Valuing Country Risk Premium
On the weekend, a founder of a polish company reached out to get my recommendation on whether his firm’s valuation would get impacted by the ongoingย #russianinvasion of Ukraine. Thus, i analysed whether the ๐๐จ๐ฎ๐ง๐ญ๐ซ๐ฒ ๐ซ๐ข๐ฌ๐ค ๐ฉ๐ซ๐๐ฆ๐ข๐ฎ๐ฆ๐ฌ ๐๐จ๐ซ ๐๐จ๐ฎ๐ง๐ญ๐ซ๐ข๐๐ฌ ๐ข๐ง ๐๐๐ฌ๐ญ๐๐ซ๐ง ๐๐ฎ๐ซ๐จ๐ฉ๐ ๐ฐ๐จ๐ฎ๐ฅ๐ ๐ข๐ง๐๐ซ๐๐๐ฌ๐ ๐ฉ๐จ๐ฌ๐ญ ๐ญ๐ก๐ข๐ฌ ๐๐ซ๐ข๐ฌ๐ข๐ฌ.
๐ ๐ ๐ณ๐ฟ๐ฎ๐บ๐ฒ๐๐ผ๐ฟ๐ธ ๐ณ๐ผ๐ฟ ๐๐ฎ๐น๐๐ถ๐ป๐ด ๐ฐ๐ผ๐๐ป๐๐ฟ๐ ๐ฟ๐ถ๐๐ธย is as follows:
1)Check whether the risk is ๐๐ข๐ฌ๐๐ซ๐๐ญ๐ ๐จ๐ซ ๐๐จ๐ง๐ญ๐ข๐ง๐ฎ๐จ๐ฎ๐ฌ and whether the founder/investors can ๐ฑ๐ถ๐๐ฒ๐ฟ๐๐ถ๐ณ๐ ๐๐ต๐ฒ ๐๐ป๐ฑ๐ฒ๐ฟ๐น๐๐ถ๐ป๐ด ๐ฟ๐ถ๐๐ธ.
2)Before this incident, the founder had taken ๐ฐ๐๐ซ ๐ข๐ง๐ฌ๐ฎ๐ซ๐๐ง๐๐ to protect against any risk of invasion. However, as this crisis has shown – “๐๐๐๐๐ฉ ๐๐จ ๐๐๐๐๐ฉ,” countries in Eastern Europe should treat these invasions as a ๐๐จ๐ง๐ญ๐ข๐ง๐ฎ๐จ๐ฎ๐ฌ ๐ซ๐ข๐ฌ๐ค ๐ซ๐๐ญ๐ก๐๐ซ ๐ญ๐ก๐๐ง ๐ ๐๐ข๐ฌ๐๐ซ๐๐ญ๐ ๐ซ๐ข๐ฌ๐ค. In my analysis, i have included Belarus, Poland, Romania, and Ukraine. Thus, i adjusted these countries’ discount rates for risk using a ๐ต๐ถ๐ด๐ต๐ฒ๐ฟ ๐ฐ๐ผ๐๐ป๐๐ฟ๐ ๐ฟ๐ถ๐๐ธ ๐ฝ๐ฟ๐ฒ๐บ๐ถ๐๐บ ๐ถ๐ป ๐๐ต๐ฒ ๐ฐ๐ผ๐๐ ๐ผ๐ณ ๐ฒ๐พ๐๐ถ๐๐ ๐ฎ๐ป๐ฑ ๐ต๐ถ๐ด๐ต๐ฒ๐ฟ ๐ฑ๐ฒ๐ณ๐ฎ๐๐น๐ ๐๐ฝ๐ฟ๐ฒ๐ฎ๐ฑ ๐ถ๐ป ๐๐ต๐ฒ ๐ฐ๐ผ๐๐ ๐ผ๐ณ ๐ฑ๐ฒ๐ฏ๐.
At the start of 2022,ย Moody’s Corporation‘s ratings for the countries are as follows:
Poland – A2
Romania – Baa3
Russia – Baa3
Belarus – B3
Ukraine – B3
Due to sanctions, Moody will downgrade Russia and Belarus’ ratings. In addition, Ukraine’s rating will go low due to the high default risk on its existing debt payments.
However, ๐๐ ๐น๐๐๐๐๐ ๐๐๐๐๐ ๐๐ ๐ผ๐๐๐๐๐๐ ๐๐๐๐๐๐๐๐๐๐๐๐, ๐น๐๐๐๐๐๐ ๐๐๐ ๐ท๐๐๐๐๐ ๐ ๐๐ ๐๐ ๐๐๐๐๐ ๐๐๐๐๐๐๐๐๐ ๐๐ ๐น๐๐๐๐๐ ๐๐๐ ๐น๐๐๐๐๐’๐ ๐๐๐๐๐๐๐๐๐๐ ๐๐๐๐๐๐ ๐ ๐๐๐๐๐๐๐๐๐๐๐๐ ๐๐๐๐ ๐๐๐๐ ๐ ๐๐๐๐ ๐๐ ๐๐๐๐๐๐๐๐ ๐๐๐๐๐๐๐ ๐๐๐๐๐๐๐๐ ๐๐ ๐๐๐ ๐๐๐๐๐๐๐๐๐ ๐๐๐๐๐๐.
For countries in the EU, due to their dependency on Russia’s energy, their inflation will increase, which will prompt the central banks to increase their interest rates, which might increase their default risk. However, their country risk premiums will remain intact.
Thus, in my view, ๐๐จ๐ฎ๐ง๐ญ๐ซ๐ข๐๐ฌ ๐ข๐ง ๐๐๐ฌ๐ญ๐๐ซ๐ง ๐๐ฎ๐ซ๐จ๐ฉ๐ ๐๐ง๐ ๐ญ๐ก๐ ๐๐ ๐ฐ๐ข๐ฅ๐ฅ ๐๐๐๐ ๐๐จ๐ฐ๐ง๐ฐ๐๐ซ๐ ๐ฏ๐๐ฅ๐ฎ๐๐ญ๐ข๐จ๐ง ๐ฉ๐ซ๐๐ฌ๐ฌ๐ฎ๐ซ๐๐ฌ ๐๐ง๐ ๐ญ๐ก๐ ๐/๐ ๐ฆ๐ฎ๐ฅ๐ญ๐ข๐ฉ๐ฅ๐ ๐ฐ๐จ๐ฎ๐ฅ๐ ๐๐จ๐ฆ๐ ๐๐จ๐ฐ๐ง due to this crisis which shows how violence/war can rip any country’s economy apart.