Is Romania affected by the country risk? Country risk, especially the score given by the rating companies is meant to lead to economic growth or recession. Is it possible for only one grade to have that much impact upon the economy? The truth is that suchcountry risk, country rating, business environment rating

Cristina Ciumas

Florina Aurica Moldovan

Stefan Manta

Viorela-Ligia Vaidean

English

Research Papers in Economics

126 
 
ASPECTS REGARDING THE COUTRY RISK AND ITS RATING 
 
Ciuma  Cristina 
“Babe -Bolyai” University Faculty of Economics and Business Administration Teodor Mihali 
Street,  No.  58-60,  400591,  Cluj-Napoca  cristina.ciuma @econ.ubbcluj.ro  Tel:  40  +  0264-
41.86.52/3/4/5 
Văidean Viorela-Ligia 
“Babe -Bolyai” University Faculty of Economics and Business Administration Teodor Mihali 
Street,  No.  58-60,  400591,  Cluj-Napoca  viorela.vaidean@econ.ubbcluj.ro  Tel:  40  +  0264-
41.86.52/3/4/5 
Man a  tefan 
“Babe -Bolyai” University Faculty of Economics and Business Administration Teodor Mihali 
Street, No. 58-60, 400591, Cluj-Napoca stefan.manta@osecluj.ro Tel: 40 + 0264-41.86.52/3/4/5 
Moldovan Florina Aurica 
Goldey-Beacome  College  4701  Limestone  Road  Wilmington,  DE  19808,  USA 
mldvn_florina@yahoo.com Tel:  +1-302-998-8814 
 
Is Romania affected by the country risk? Country risk, especially the score given by the rating companies 
is meant to lead to economic growth or recession. Is it possible for only one grade to have that much 
impact  upon  the  economy?  The  truth  is  that  such  a  rating  has  multiple  repercussions  not  only  at 
macroeconomic level but also at the microeconomic one. The real question is how reliable and especially 
how objective are these ratings?   
 
Key-words: country risk, country rating, business environment rating 
 
JEL Code: F14, F59 
 
Country risk reunites the possibilities that an institution may enlist losses, mainly due to the 
exposure towards the partner countries. These losses may be caused by economic, social, political 
or natural events which may or may not be controlled by the government of that country. Thus, 
the rating obtained by each country is designed to present the investors a clearer image of the 
possibilities  that  they  have  in  establishing  business  relations  with  foreign  partners  or  the 
possibility of business internationalization. 
Created in 1991 with the support of Organization of Economic Co-operation and Development 
(OECD) and also with the help of the COFACE French insurance company, EXIMBANK has the 
main  objective  of  sustaining  foreign  trade,  of  encouraging  the  export  and  especially  the 
production  designated  for  export.  It  grants  credits  in  favorable  conditions  to  the  public  and 
private societies with a Romanian headquarters if they can prove the compliance of some criteria, 
like: firm contracts, irrevocable letters of credit, various bank guarantees, etc. 
Eximbank  basically  helps  exporters  by  offering  specific  products  and  services  designed  to 
encourage the foreign trade of Romania. Their products are: export credits, guaranteed loans for 
export, export security to stimulate the development of goals and complex products with long 
manufacturing cycle, warranty export freight, letters of bank guarantee, commercial information 
about business partners, insurance policies of export credits and long-term, policies of credit 
insurance for export production, policies of buyer credit insurance and ensuring exchange rates. 
 
 
 
 
 
 127 
 
 
 
Figure no.1. The structure of Eximbank customers exports depending on how they are supported 
 
 
Eximbank ratings compared to Coface ones 
The intention of these two companies is to support foreign trade transactions, but especially the 
possibility to offer relevant information to their clients about the countries in which they place 
their business activities. So, these companies offer explicit data about the financial status of their 
partners, about the economic and global context of the partner country. 
The  method  Eximbank  elaborated  is  a  combination  of  quantitative  and  qualitative  analysis, 
comparable with the techniques used by the great rating agencies and its results score and classify 
the analyzed countries into five risk categories: Aa, Bb, Cc, Cd, Dd, synthesized as follows:  
Table no.1 Eximbank ratings 
Class  Score  Class risk definition 
Aa  100-53  payment difficulties appear impossible 
Bb  52-37  payment difficulties and losses are possible 
Cc  36-24  payment difficulties and moderate losses appear to be 
predictable 
Cd  23-15  serious payment problems, including possible rescheduling 
Dd  14-0  appreciable losses appear to be inevitable 
Source: Ciuma , C., Asigurări generale, Editura Casa Căr ii de  tiin ă, Cluj-Napoca, 2007, pag.298-302 
 
Aa category is characterized by a high inability to pay. Furthermore, the countries classified in 
Bb category are characterized by the possibility of payment difficulties and minor losses. Cc 
rating stands for the countries where these risks and losses are moderate. In the last part of the 
classification  categories,  Cd  is  specific  to  countries  with  serious  payment  problems  and  the  
rescheduling of payments is possible. The last risk class, Dd, is for countries characterized by 
losses which are regarded as unavoidable. 
We’ll further present the methodology used by Eximbank as for the assessment of the country 
risk. Eximbank assess country risk on short term based on two categories of factors: economic 
factors and political factors. The weight of these two categories in the final score is equal, each 
sharing 50% of it. 
 
 
 
 128 
 
 
 
 
 
 
I. Economic factors:  II. Political factors: 
1.  the development level of the country; 
2.  real growth rate of GDP; 
3.  the payments’ balance; 
4.  inflation ; 
5.  export dependence ; 
6.  reserves in months of imports ; 
7.  coverage of imports by exports ; 
8.  short-term debt ; 
9.  external payments situation. 
1. current state of governance;  
2. government economic policy;  
3. internal tensions;  
4. international position;  
5. debt restructuring;  
6. experience of bilateral relations . 
1. The development of the country, expressed in GDP per capita, is assessed on a scale from 0 to 
10 points: 
GDP per capita USD  SCORE 
0-500  0 
500-1000  1 
1000-2000  2 
2000-3000  3 
3000-4000  4 
4000-5000  5 
5000-6000  6 
6000-7000  7 
7000-8000  8 
8000-10000  9 
Peste 10000  10 
2. The pace of real GDP growth may receive a maximum of 10 points: 
 
The  pace  of  real  GDP 
growth (%) 
SCORE 
under - 1  0 
-1 – 1  2 
1 – 3  4 
3 – 5  6 
5 – 8  8 
over 8  10 
3. The situation for the balance of payments is calculated as a percentage ratio of the balance of 
payments and GNP. It is estimated by a maximum of 10 points. 
 
Balance of payments 
/G.N.P. 
SCORE 
under -10  0 
-10 – -5  2 
-5 – -3  4 
-3 – -1  6 
-1 – 2  8 
over 2  10 
4. Inflation rate in the reference year (curent year) can receive a maximum of 5 points. 
Inflation rate (%)  SCORE 
over 50  0 
30-50  1 129 
 
 
 
 
 
 
 
 
 
Considering its development for the last four quarters, a correction factor of + / - 1 is applied. 
5. Dependence on exports is calculated as the ratio between the revenue percentage of the main 
product exported and the total value of exports – up to 10 points. 
 
Revenues  from  the  main 
exported product (%) 
SCORE 
over 55  0 
55-50,1  1 
50-45,1  2 
45-40,1  3 
40-35,1  4 
35-30,1  5 
30-25,1  6 
25-20,1  7 
20-15,1  8 
15-10,1  9 
under 10  10 
Depending on the international market situation a coefficient of -1 may be applied for a negative 
trend and +1 otherwise. 
6. Coverage of imports by exports is calculated as the ratio between the percentage of exports and 
imports, up 10 points. 
 
 
 
 
 
 
 
7. Reserves in months of imports - up 15 points 
 
Reserves (months)  SCORE 
Under 1 month  0 
1-2  4 
2-4  6 
4-6  9 
6-9  12 
over 9  15 
8. Short-term debt as a percentage to total external debt - up 15 points 
 
Short-term  debt  /  Total  debts 
(%) 
SCORE 
over 25  0 
20-25  3 
15-20  6 
10-15  9 
5-10  12 
20-30  2 
10-20  3 
5-10  4 
under 5  5 
Coverage degree (%)  SCORE 
under 80  0 
80-100  2 
100-110  4 
110-120  6 
120-130  8 
over 130  10 130 
 
under 5  15 
9. External payments position is determined as the ratio between external debt service and export 
- maximum 15 points. 
External payments (%)  SCORE 
over 70  0 
60-70  3 
50-60  5 
40-50  7 
30-40  9 
20-30  11 
10-20  13 
under 10  15 
 
 
II. Political factors 
  1. Current state of the governance - maximum 20 points, given for:  
- Inefficient governance, frequent changes of undemocratic governments, corruption - 0 points; 
- Effective governance, regular and normal government changes - 20 points. 
  2. Government's economic policy - maximum 15 points, refers to:  
- Economic unstable, incoherent, and unfavorable policy regarding the foreign capital - 0 points;  
- Reasonable consistency, relatively restrictive regime regarding the foreign capital - 7 points;  
- Good consistency, favorable regime of foreign capital - 16 points. 
3. Internal tensions - maximum 15 points:  
- War - 0 points;  
- Social, ethnic, political, racial, cultural, religious tensions –if they don’t appear, 2 points will be 
assigned for each.  
  4. International position - maximum 20 points:  
- International sanctions - 0 points;  
- Relative isolation - 5 points;  
- Relationships - 10 points;  
- Good relations with major economic powers - 15 points.  
  5. The restructuring of debts - up to 3 points:  
- Payments’ cuts-0 points;  
- Failure in negotiations with IMF - 3 points;  
- Repeated rescheduling - 6 points;  
- Rescheduling - 9 points;  
- No problems - 15 points.  
  6. Experience with bilateral relations - maximum 15 points:  
- Default - 0 points;  
- Difficulties in rescheduling - 1 point;  
- Rescheduling flawlessly - 3 points;  
- Delays - 5 points;  
- Small delays - 10 points;  
- No problems - 15 points.  
Depending on the analyst’s judgment, a correction of up to 5% can be made. 
  
The final score (index of country risk) is calculated as follows: 
      Final Score = (Economic score x Political score) / 100.  
 131 
 
Depending  on  the  score  obtained,  the  countries  are  classified  into  the  above  presented  5 
categories.  Country  Risk  Assessment  by  Eximbank  is  done  not  only  to  substantiate  their 
decisions but also for providing consultancy services in this field for exporters. 
On the other hand, Coface wants to facilitate trade at the global "business to business" level, 
offering  four  lines  of  services  to  its  customers,  such  as  total  or  partial  outsourcing  of  trade 
management,  the  financing  and  the  protection  of  revenues  (credit  insurances,  credit  reports, 
claims  management  and  factoring  services).  Besides  the  resulting  rating  for  each  examined 
country, Coface gives a distinctive mark for the business environment of the country that can 
considerably vary from country rating. 
Coface characterizes the business environment  of a country  in the same  manner in which it 
determines the country rating. Countries are studied based on seven categories of risks that are 
meant  to  characterize  the  economic  climate  and  business.  By  these  ratings,  Coface  presents 
relevant information about the financial, legal system of the country with a strong emphasis on 
the correctness of the system, emphasizing whether the business environment of the country is 
favorable to inter-company transactions or not. 
This new system is implemented on the basis of two modules. The main idea of the new rating 
system is based on the experience of Coface to analyze the quality of the available information 
about companies and the legal protection for the creditors. Ratings based on the experience of 
Coface are supplemented by a second module based on the quality of the institutional network, 
which tries to reflect how the weaknesses of this system may further influence companies. In this 
part  public services are particularly included (government, education, health, infrastructure), the 
respect of the people towards the law system, corruption etc. 
 
Based on these criteria Coface currently assesses 150 countries. Moreover, the highest possible 
grade is A1 and the worst is D. The following table summarizes the ratings granted by Coface: 
 
Table 2 Business environment ratings 
A1  The business environment is very good. Corporate financial information is available and reliable. Debt 
collection  is  efficient.  Institutional  quality  is  very  good.  Inter-company  transactions  run  smoothly  in 
environments rated A1. 
A2  The  business  environment  is  good.  When  available,  corporate  financial  information  is  reliable.  Debt 
collection is reasonably efficient. Institutions generally perform efficiently. Inter-company transactions 
usually run smoothly in the relatively stable environment rated A2.  
A3  The  business  environment  is  relatively  good.  Although  not  always  available,  corporate  financial 
information  is  usually  reliable.  Debt  collection  and  the  institutional  framework  may  have  some 
shortcomings. Inter-company transactions may run into occasional difficulties in the otherwise secure 
environments rated A3. 
A4  The business environment is acceptable. Corporate financial information is sometimes neither available 
nor  sufficiently  reliable.  Debt  collection  is  not  always  efficient  and  the  institutional  framework  has 
shortcomings. Inter-company transactions may thus run into appreciable difficulties in the acceptable but 
occasionally unstable environments rated A4. 
B  The  business  environment  is  mediocre.  The  availability  and  the  reliability  of  corporate  financial 
information vary widely. Debt collection can sometimes be difficult. The institutional framework has a 
few troublesome weaknesses. Inter-company transactions run appreciable risks in the unstable, largely 
inefficient environments rated B. 
C  The  business  environment  is  difficult.  Corporate financial  information  is  often  unavailable and  when 
available, it’s often unreliable. Debt collection is unpredictable. The institutional framework has many 
troublesome weaknesses. Inter-company transactions run major risks in the difficult environments rated C. 
D  The business environment is very difficult. Corporate financial information is rarely available and when 
available usually unreliable. The law system makes debt collection very unpredictable. The institutional 
framework has very serious weaknesses. Inter-company transactions can thus be very difficult to manage 
in the highly risky environments rated D. 132 
 
Source: Authors’ processing 
 
In most cases, i.e. for 93 countries, the rating of the business climate coincides with the country 
rating. For 39 countries, Coface has given a lower rating for the business climate as compared to 
the  country  rating.  Furthermore,  for  18  countries,  Coface  has  given  a  higher  rating  for  the 
business climate compared to the country rating. 
 
Figure no. 2 Business environment ratings compared to country ratings 
 
Even if the system and the scoring process  is calculated through a different methodology by 
Eximbank and Coface, the marks provided by these companies revealed the same features to a 
great extent, Coface taking advantage of achieving a more detailed analysis. The big plus that 
Coface brings compared to Eximbank is that it manages not only to analyze the global and 
country specific issues but the business environment as well. 
 
Conclusions/ Critical points 
The  methodology  used  by  Coface  is  based  on  the  elements  of  qualitative  analysis  and  the 
methodology  used  by  Eximbank  is  mainly  based  upon  quantitative  analysis.  Although  both 
Eximbank  and  Coface  offer  support  for  the  institutions  developing  foreign  trade,  it  is  very 
important to follow the objectivity of the presented data. Easily such institutions may have a role 
in handling the economy. Companies in this area should be equidistanced and "cold" in their 
analysis furthermore avoiding making  games for their personal interest or even avoiding the 
political attempts to change the image of the actual economic situation. 
 
Bibliography 
1. Baral, G., L’Assurance des Credits à l’Exportation, Manthan-Economique, Paris, 1999 ; 
2. Cojocaru, M., Asigurarea creditelor de export în perspectiva aderării României la Uniunea 
Europeană, Finan ele  i infla ia, 2005;  
3. Skipper, Harold D., Kwon, W. Jean, Risk Management and Insurance  – Perspectives in a 
Global Economy, Blackwell Publishing, Oxford, UK, 2007 ; 
4. http://www.coface.com/ 
5. http://www.eximbank.ro/ 
   

Asigurarea creditelor de export în perspectiva aderării României la Uniunea Europeană, Finan ele i infla ia,

L’Assurance des Credits à l’Exportation,

Risk Management and Insurance – Perspectives in a Global Economy,

ASPECTS REGARDING THE COUTRY RISK AND ITS RATING

http://steconomice.uoradea.ro/anale/volume/2009/v1-international-relations-and-european-integration/17.pdf

ASPECTS REGARDING THE COUTRY RISK AND ITS RATING

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