Page 50 - Theoretical and Practical Interpretation of Investment Attractiveness

After that, the likelihood of political instability for each regime ("low", "moderate",
"high", and "very high" on the risk scale) and the impact on the business environment in the
country are assessed by another 11 indicators.
In the second stage, if we consider that the probability level in the final ratings of
regimes is 100%, the resulting numerical assessment is translated into a letter scale (from A
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to D) based on investments in financial transfers, direct investments, and export markets .
Standard & Poor's Ratings Group (S&P). S&P's rating methodology is based on
forecasting the ability to accumulate debts, the likelihood of fulfilling obligations, and the
economic risk based on the ability to pay debts (3 factors) and the economic risk based on the
ability to pay debts (5 factors). The rating system for countries' creditworthiness is based on
a 3-letter scale (from AAA to D).
There are other methodologies for assessing country risk, such as those developed by
S.J. Rundt & Associates Inc., Institute of Management Development (IMD),
PricewaterhouseCoopers, Dun & Bradstreet, among others.
The main differences between rating services, in terms of their nature, lie in their
information sources (quantitative/qualitative) and the types of risk indexes (ordinal/scalar)
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they use .
Qualitative assessment methods. These methods are based on expert opinions on
factors that influence the risk level. The subjectivity of these assessments ensures the
authenticity of the results. The use of these methods benefits experienced expert groups who
can provide insights that improve the understanding of the country's situation, and even
facilitate research purposes.
Analyzing the results can further improve the level of confidence in factors that
influence the risk level, which can be quantified and systematized by means of normalization.
This allows for the grouping of countries being researched based on risk, but evaluating risks
at deeper levels within these groups can be challenging.
Quantitative assessment methods.
• Establishing a catalog of country risks. This method evaluates risks based on
statistical information from the country, identifying the most important risk factors that affect
the risk assessment and the country's development. R – the resulting risk level – is often a
function of multiple factors (xi – the values of individual factors):
R = R(x1, x2, x3, ... xn) = R(xi) (1.9.)
i = 1...n, where only objective numerical values (usually economic indicators) are used
to calculate the risk, or risk assessment (quantitative and qualitative) methods are used.
The use of these methods is effective in predicting changes in the country's risk level
through simple extrapolation; avoiding the consideration of significant factors affecting the
country's risk level at a certain level; and reducing errors in predicting changes in the final
rating due to the rejection of factor outliers.

69 https://www.prsgroup.com/about-us/our-two-methodologies
70 http://www.standardandpoors.com/en_US/web/guest/ratings/ratings-criteria

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