Country Risk Rating - OECD and ECGC.

'Country Risk Rating' refers to the evaluation of the risk associated with investing in or exporting to a particular country. Two widely referenced sources for country risk ratings are the OECD (Organisation for Economic Co-operation and Development) and ECGC (Export Credit Guarantee Corporation of India).

Here's an overview of both:

🌍 OECD Country Risk Rating

The OECD publishes a Country Risk Classification as part of its arrangement on officially supported export credits.

🔹 Purpose:

To help exporters and financiers assess the risk of non-payment by foreign buyers due to country-specific risks.

🔹 Rating Scale:

• Ranges from 0 to 7
  • 0 = Lowest risk
  • 7 = Highest risk

These classifications reflect the likelihood of payment defaults by central governments, based on:

• Political stability
• Economic performance
• External financial position
• Payment experience

🔹 Use:

Primarily used to determine the minimum premium rates for export credit insurance.

🇮🇳 ECGC Country Risk Rating

The Export Credit Guarantee Corporation of India (ECGC) provides export credit insurance support to Indian exporters.

🔹 Purpose:

To protect Indian exporters against the risk of non-payment by overseas buyers or importers due to political and commercial risks.

🔹 Rating System:

• Countries are classified into 7 risk categories: A1, A2, B1, B2, C1, C2, and D
  • A1 = Lowest risk
  • D = No cover / highest risk

🔹 Factors Considered:

• Political risk (e.g., war, revolution, civil unrest)
• Economic conditions
• Foreign exchange availability
• Payment record
• Government stability

🔹 Use:

Helps ECGC decide:

• Whether to offer insurance
• Terms and premium rates

📊 Comparison Table:

Let's delve deeper into the OECD and ECGC country risk ratings, exploring their methodologies, applications, and recent developments.

🌍 OECD Country Risk Classification

Purpose and Scope

The Organisation for Economic Co-operation and Development (OECD) provides a Country Risk Classification to assess the risk of non-repayment of export credits by foreign buyers. This classification is pivotal for export credit agencies worldwide, guiding them in determining the minimum premium rates for export credit insurance.

Methodology

The OECD employs a two-step approach:

1. Quantitative Assessment: Utilizes the Country Risk Assessment Model (CRAM), which evaluates:
   • Payment Experience: Historical data on repayment behaviors.
   • Financial Situation: Economic indicators from the IMF and World Bank.
   • Economic Situation: Policy performance, growth potential, and vulnerabilities.
   • Institutional Situation: Governance indicators from the World Bank.
2. Qualitative Assessment: Experts review CRAM results, integrating factors like political instability, natural disasters, or conflicts that might not be fully captured in the model.

Classification Scale

Countries are rated on a scale from 0 to 7, where:

• 0: Lowest risk
• 7: Highest risk

This classification helps determine the Minimum Premium Rates (MPRs), ensuring that export credit agencies charge premiums commensurate with the assessed risk.

Recent Developments

The OECD has recently downgraded the UK's economic growth forecasts due to escalating global tariff wars initiated by the Trump administration. The UK's annual economic growth forecast was reduced by 0.3 percentage points for this year to 1.4% of GDP and by 0.1 percentage points for the next year to 1.2%. Despite the downgrade, the UK is expected to be the second-fastest growing economy in the G7. This reflects the OECD's dynamic approach to adjusting risk classifications based on evolving global economic conditions.

🇮🇳 ECGC Country Risk Classification

Purpose and Scope

The Export Credit Guarantee Corporation of India (ECGC) provides export credit insurance support to Indian exporters. Its country risk classification aids in determining the level of cover and premium rates for exports to various nations.

Classification Scale

ECGC classifies countries into the following categories:

• A1: Insignificant Risk
• A2: Low Risk
• B1: Moderate Low Risk
• B2: Moderate Risk
• C1: Moderately High Risk
• C2: High Risk
• D: Very High Risk

These classifications influence the premium rates charged to exporters, with higher-risk countries attracting higher premiums.

Recent Developments

• Bangladesh: In August 2024, ECGC downgraded Bangladesh's country risk classification from B1 (Moderate Low Risk) to B2 (Moderate Risk) due to political upheaval leading to a regime change. This downgrade increased the premium rates for exports to Bangladesh.
• Russia: Following the geopolitical tensions arising from the Russia-Ukraine conflict, ECGC modified Russia's cover category from Open Cover to Restricted Cover Category-I (RCC-I). This change requires case-by-case approval for export transactions, reflecting the heightened risk.
• Sri Lanka: In April 2022, ECGC placed Sri Lanka in the Restricted Cover Category-I (RCC-I) due to the country's economic and political instability. This move aimed to mitigate potential risks for Indian exporters.

🔍 Comparative Analysis

📌 Conclusion

Both the OECD and ECGC play pivotal roles in assessing and mitigating country-specific risks associated with international trade. While the OECD provides a global framework influencing export credit agencies worldwide, ECGC tailors its classifications to the Indian context, ensuring that Indian exporters are adequately protected against potential risks. Understanding these classifications is crucial for businesses engaged in international trade, as they directly impact insurance premiums and risk management strategies.