Two main approaches are used to measure country risk: qualitative and quantitative. The qualitative approach relies on the opinions of experts, namely politicians, members of unions, economists, etc., and the country’s existing data gathered by performing a variety of government researches. Financial analysts, in turn, collect data from newspapers, local radio, television, official and embassy publications and other sources. There is always a subjective element to experts’ opinions, which makes relying on them somewhat unsafe but their views may be used by analysts to create a credit grade. Analysts are also in a position to consider country’s historical events and current political situation.
Quantitative relies mostly on the data gathered by the government. This data is further computed by analysts and composed into an overall score. The main advantage of this method is, of course, the fact that it is considered to be much more objective. Nevertheless, one must take into account that the information is automatically computed and not interpreted by human beings. This may result in misinterpretation of data which would lead to some misconceptions that would be based on it.
There are also some different methods that combine qualitative and quantitative approach, such as Risk Rating Method. While using this method, one is able to take into account four crucial aspects of a country. The results are represented in the form of scores. A high score shows that country risk premium is at a low rate, while low score would mean that it is, in fact, significant. These four aspects are Economic Indicators, Debt Management, Political Factors, and Structural Factors. They are included in a mathematical formula that is used to calculate the risk. The evaluation of country risk is then represented in a number that differs between zero and one hundred.