AN ANALYSIS OF COUNTRY RISK WHEN INTERNATIONAL CAPITAL MARKETS LEND TO DEVELOPING NATIONS

In light of the rapid growth in developing countries' borrowing from the international capital market and recent indicators of financial and economic instability, the impact of country risk on the amount of international borrowing (loans and bonds) of sixteen developing countries is estimated. Based on a model of sovereign risk analysis, the results indicate that for the period 1992-94, variables indicating political risk (transfer risk), credit risk, and economic risk are significant. Both bivarite and multiple regression estimates are obtained and test for stability of the model is conducted. The use of country risk ratings as independent variables of the model is an improvement of the earlier methodology based on external debt ratios.