country risk
Country risk is the chance that a country's politics, policy or currency damages your investment, regardless of how good the business is.
In plain English
You can pick a wonderful company and still lose money because of where it happens to be standing.
Country risk is everything that can harm an investment for reasons that have nothing to do with the investment itself. A currency that collapses. A policy reversed overnight. A government that cannot pay. Contracts that courts will not enforce. Rules that change while you sleep.
It is the reason a Nigerian company earning excellent profits can be valued far below an identical company in Germany. Investors are not insulting the business. They are pricing the ground it stands on.
For an ordinary Nigerian this is not a foreign concept, it is your daily life. Your salary, your savings, your property and your pension are all denominated in one currency and exposed to one government's decisions. You are, whether you chose it or not, holding a highly concentrated position in a single country.
No amount of picking good Nigerian shares diversifies that away, because they all share the same risk.
Which is why holding some assets outside Nigeria, in a stronger currency, is not pessimism about the country. It is the ordinary response of anybody who understands that they are already all in on one bet.
Your Nigerian shares perform well and the naira falls 40 percent. Measured in dollars, you lost money while your companies were doing everything right. That is country risk, and no stock picking could have prevented it.
Questions people ask
How do I reduce country risk?
By holding some assets outside the country or in a foreign currency, such as eurobonds, dollar funds or foreign equities. It is diversification, not disloyalty.
Does it affect Nigerian companies?
Considerably. Investors apply a discount to Nigerian assets because of it, which is why identical businesses are valued lower here than abroad.
Is it the same as political risk?
Political risk is one component. Country risk also includes currency, policy and legal risk, all of which can damage an investment independently.
Last reviewed