COUNTRY RISK INDEX

Please note: BMI is enhancing its risk analysis with a new scoring system following acquisition of GeoQuant, a market-leading
provider of political risk data. From March 27 2024, risk scores are inverted: zero now represents the lowest risk and 100 the
highest, for clearer, industry-standard assessments. This methodology document has been updated accordingly.

BMI’s Country Risk Index (CRI) provides a composite score from 0-100, with
100 being the highest risk, broken down into the following three sub-indices:
• Political Risk Index
• Economic Risk Index
• Operational Risk

The CRI quantifies the risk of a shock, such as an economic crisis or a sudden change in the political environment that would
affect those conducting business within a country, territory, or special administrative region. The composite CRI is made up of
the average of our Political Risk Index, Economic Risk Index, and Operational Risk Index.
The Country Risk Index is made up of the components of three risk indices: (1) the Political Risk Indices (Governance
Risk, Society Risk and Security Risk); and (2) our economic Risk Index (Short- and Long Term Economic Risk), and (3) the
Operational Risk Index. As a result, the CRI reflects the types of political, economic and security risks that investors are
exposed to in the market. For example, an autos manufacturer that exports cars to a country has a different type of risk
exposure than one that has established a factory in the country and will be confronting more structural characteristics of the
economy and the policy environment.
To increase visibility of the key areas of risk – which again may vary from client to client – each Index is divided into
subcomponents, which are weighted according to their respective importance in terms of impacting stability and the overall
investment climate.

Operational Economic Risk,

Risk, 33.3% 33.3%

Political Risk,
33.3%

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POLITICAL RISK
BMI’s Political Risk Index comprises a core set of political risk indicators in a tiered model, aggregating
a series of lower-level indicators into an overall ‘Political Risk’ score. All indicators are scaled from
0-100, with 100 being the highest risk.
The overall Political Risk score is made up of the mean average across three distinct pillars: Governance Risk, Society Risk,
and Security Risk.

GOVERNANCE RISK: SECURITY RISK:

Governance Risk is a critical concept that encompasses the Security Risk evaluates the potential threats to a nation’s
aggregate potential for challenges and disruptions that can stability and safety, deriving from both internal and external
affect a government’s ability to govern effectively. It is a sources.
composite measure that includes Government, Institutional,
• Internal Security Risk (50%) considers the likelihood of
and Policy. Together, these dimensions of Governance Risk
disturbances from political violence through civil unrest
provide a holistic view of the political and administrative
and terrorism, criminal activities, environmental disasters,
environment, indicating the likelihood of disruption and the
and the adequacy of the country’s security forces to
overall quality of governance in a country.
manage such challenges.
• Government Risk (33.3%) evaluates the stability of
• External Security Risk (50%) assesses the potential for
support for the current regime from the, elite factions, key
international conflicts, diplomatic tensions, alliances,
institutions, and political opposition.
cross-border environmental issues, and the state’s military
• Institutional Risk (33.3%) assesses the robustness and strength to defend against and manage external threats.
reliability of the state’s institutions in maintaining stability,
delivering public services, and upholding the rule of law.
• Policy Risk (33.3%) examines the potential volatility and
soundness of a government’s economic regulatory and
trade policies and their impact on the domestic operating
and investment climates.

SOCIETY RISK:
Society Risk captures the potential for societal factors to
disrupt or negatively impact a country or territory’s social
dynamics, elevating the risk of civil unrest. It is broadly
categorized into Social Polarization Risk and Human
Development Risk.
• Social Polarization Risk (50%) assesses the likelihood of
division and conflict arising from ethnic, religious, socio-
economic disparities, or migration and demographic
changes. These factors contribute to tensions, reducing
social cohesion and potentially resulting in unrest.
• Human Development Risk (50%) considers the extent
to which a population enjoys fundamental civil liberties,
population health, and the quality and availability of
education and skills development, known as human capital.

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ECONOMIC RISK
The Economic Risk Index assesses the degree to which the country balances effectively non-
inflationary growth, contains fiscal and external deficits, and maintains manageable debt ratios.
The indices use BMI’s historical data and forecasts: as data is revised and forecasts change, so the
scores within the indices change.

LONG-TERM ECONOMIC RISK INDEX (LTERI) SHORT-TERM ECONOMIC RISK INDEX (STERI)
The LTERI takes into account the structural characteristics The STERI seeks to define current vulnerabilities and assess
of economic growth, the labour market, price stability, real GDP growth, inflation, unemployment, exchange rate
exchange rate stability and the sustainability of the balance fluctuation, balance of payments dynamics, as well as fiscal
of payments, as well as fiscal and external debt outlooks. and external debt credentials over the coming two years,
The Index is calculated by looking at the previous five using the current year as a reference point. This skews the
years of economic data and our forecasts for the next five STERI in favour of economies with low twin deficits (current
years. A number of other structural factors are also taken account and fiscal) or surpluses, low inflation and higher
into account, including dependence on the primary sector, growth rates. There is also a subjective component, which
reliance on commodity imports, reliance on a single export measures the perceived independence of the central bank in
sector, and central bank independence. monetary policy.
The LTERI breaks down into the following components: The STERI breaks down into the following components:
• Structure of economy (33%) – This identifies dependencies • Economic activity (25%) – This evaluates growth,
on a single sector or trade partner or commodity, as well as investment and household spending and
past growth volatility and central bank independence. unemployment rates.
• Economic activity (17%) – This evaluates the recent • Monetary (12.5%) – This evaluates inflation and real
history of growth and unemployment. interest rates.
• Monetary (8%) – This evaluates inflation and real
• Fiscal (12.5%) – This evaluates the fiscal balance,
interest rates.
government debt load and size of the tax base.
• Fiscal (8%) – This evaluates the fiscal balance,
government debt load and size of the tax base. • External (25%) – This evaluates current account and
external debt dynamics, and the state’s ability to finance
• External (17%) – This evaluates current account and
deficits.
external debt dynamics, and the state’s ability to finance
deficits. • Financial (25%) – This evaluates the sophistication and
• Financial (17%) – This evaluates the sophistication and depth of the local financial market, including borrowing
depth of the local financial market, including internal and capabilities as well as capital control risks.
external borrowing capacity as well as capital control risks.
Economic Risk Index
(100%)

Long – Term Economic Risk (50%) Short – Term Economic Risk (50%)

Structure of Economy (33%) Economic Activity (25%)

Economic Activity (17%) Monetary (12.5%)

Monetary (8%) Fiscal (12.5%)

Fiscal (8%) External (25%)

External (17%) Financial (25%)

Financial (17%)
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OPERATIONAL RISK
Our Operational Risk Index quantitatively compares the challenges of operating in 200+ countries
worldwide. The index scores each country on a scale of 0-100, with 100 being the highest risk.
Each country has a headline Operational Risk Index score, which is made up of four categories of analysis, each further broken
down into three sub-sectors. The individual categories and sub-categories are also scored out of 100, with 100 being highest risk.
The index focuses on four main risk areas: labour market, trade and investment, logistics, and crime and security.

• Labour Market: evaluation of the risks surrounding the • Logistics: evaluation of the quality and extent of the
size, education levels and costs of employing workers in transport infrastructure, ease of trading, and quality and
a country. availability of utilities.
• Trade and Investment: evaluation of the openness of • Crime and Security: evaluation of operating conditions
an economy, level of government intervention and the with respect to interstate conflict risk, terrorism, crime,
quality and efficacy of the legal environment. including cyber crime and organised crime.

Indicator Weighting (%)

Labour Market Risk 25%
Trade and Investment Risk 25%
Logistics Risk 25%
Crime and Security Risk 25%

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 Political Violence
Criminal Violence
Internal

Security Force
Security

Environment / Geography
BREAKDOWN OF RISK INDEX COMPONENTS

Security Force
External

Environment / Geography
International Relations
Civil Liberties
HumanDev

Health
Human Capital
Society
Political Risk

Ethno-Religious
SocPolar

Socio-Economic
Migration / Population
Mass Support

Government
Elite Support
Institutional Support
Institutional Stability

Institutional
Governance
State Capacity

Political Risk Index

Rule of Law

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Rule of Law
Macro-Economic Policy

Policy
Micro-Economic Policy
Investment / Trade Policy
Fundamental Model: Risk Indicator Definitions
Risk Indicator Definition
Government Risk
Mass Support Risk Popular support for the current government
Elite Support Risk Support for current government among leaders of social/political/economic organizations
Institutional Support Risk Chief executive's control over/support from branches of government
Opposition Risk Strength of political opposition; feeds into Elite/Institutional Support risk
Institutional Risk
Institutional Stability Risk Stability and resilience of government institutions
State Capacity Risk Government's ability to implement/enforce policy and deliver public goods/services
Predictability of legal/court system and degree of political interference therein;
Rule of Law Risk*
prevalence of corruption
Policy Risk
Predictability of legal/court system and degree of political interference therein;
Rule of Law Risk*
prevalence of corruption
Macroeconomic Policy Risk Policies related to inflation/employment; demand-side policies more broadly
Microeconomic Policy Risk Policies related to business environment/supply chain; supply-side policies more broadly
Investment/Trade Policy Risk Openness/stability of investment and trade policy
Social Polarization Risk
Ethno-Religious Risk Polarization among ethnic/religious groups
Socio-Economic Risk Polarization among socio-economic groups
Migration/Population Risk Social/economic pressures arising from migration/population dynamics
Human Development Risk
Civil Liberties Risk Freedom of expression/assembly and personal autonomy; state-sanctioned discrimination
Health Risk Quality of/access to health care; resilience to disease
Human Capital Risk Quality of education system; skill level of workforce
Internal Security Risk
Political Violence Risk Prevalance/likelihood of civil war, insurgency, terrorism
Criminal Violence Risk Prevalance/likelihood of criminal activity/violence
Environmental Risk (Internal) Political/economic risks arising from the physical/built environment, infrastructure, etc.
Security Force Capacity Risk* Capabilities/strength of security forces (e.g. military, federal police)
External Security Risk
International Relations Risk Prevalence/likelihood of diplomatic, military and economic conflict with other countries
Environmental Risk (External) Political/economic risks arising from environmental and geographic conditions
Security Force Capacity Risk* Capabilities/strength of security forces (e.g. military, federal police)
Note: • indicates Tier 3 Risk indicators that appear under multiple higher-level tiers

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Long-Term Economic Risk Index
Component Sub-Component Rationale
Primary sector, A large primary sector leaves the economy vulnerable to commodity
% of GDP price volatility.
This indicator is a proxy for the state's absolute economic
GDP per capita
development.
A history of volatile growth is detrimental to the quality of economic
GDP volatility
growth.
Diversified export markets limit risks arising from a shock to a key
Structure of economy Trade concentration
trading partner.
Reliance on commodity A high reliance on commodity imports leaves a state vulnerable to
imports fluctuating commodity prices.
Percentage of exports An over-reliance on a single sector indicates greater vulnerability to an
from a single sector economic shock.
Central bank Government control of monetary policy increases the risk that it will
independence follow the political cycle rather than the economic cycle.
Strong growth results in higher scores, but above-trend growth is a
GDP growth, % concern. The risks from fast growth are greater in rich states than poor
Economic activity states.
Sustained high unemployment risks undermining the country's long-
Unemployment, %
term growth potential.
High inflation damages competitiveness and will most likely
exacerbate currency volatility. Very low inflation and deflation tends
Inflation, %
to indicate a decline in money supply, which typically results in low
Monetary indicators growth.
High real interest rates constrain investment. Very low or negative
Real interest rates, %
interest rates suggest inappropriate monetary policy.
A surplus is good; a small deficit is acceptable. We have greater
Fiscal balance, % of
tolerance for moderate deficits (-1.5 to -5.0% of GDP) for developing
GDP
states, as they require greater capital investment.
Government debt must be serviced; this places a burden on
Fiscal indicators Government debt,
government finances and suggests a need for higher tax levels over
% of GDP
the longer term.
Government revenue, A large but not overbearing tax base is essential to maintaining sound
% of GDP fiscal credentials into the long term.
Import cover, months The larger the better, though we are more tolerant of lower levels
of goods and services for states with a floating currency regime, as the currency's ability to
imports move acts as an automatic stabiliser.
High levels of foreign debt leave the economy vulnerable to currency
External indicators
External debt, % of GDP fluctuations. If this is government debt, it will result in lower spending
and can crowd out private sector investment.
Current account, A high current account deficit leaves the currency - as well as inflation
% of GDP and growth - vulnerable to capital flow volatility.

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Long-Term Economic Risk Index (continued)
Component Sub-Component Rationale
A long and deep local sovereign yield curve enables the government
Local debt markets to efficiently manage its local debt pile and provides corporates with
local benchmarks.
Local corporates and inward investors benefit from a wide variety
of financial market instruments that help them to better manage
Sophistication of
liabilities. Examples include interest rate swaps, forward rate
financial market
agreements, interest rate futures, cross-currency swaps and currency
forwards. Not all products are available in all currencies/markets.
Most countries have some form of restriction or regulations on the
Financial indicators inflow and outflow of funds. This can range from full capital controls,
Capital control risk which impede local and foreign businesses, to relatively benign
anti-money laundering regulations. Businesses benefit from fewer
restrictions.
Few states can source all of their budgetary financing needs from
the domestic market and instead need to access international credit
External borrowing or money markets. States have varying degrees of access to foreign
capabilities credit given their perceived creditworthiness and credit history. The
key proxy is the length of the foreign currency debt curve of the
government and/or key quasi-sovereigns.

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Short-Term Economic Risk Index
Component Sub-Component Rationale
Strong growth is generally a positive. Scores are weighted by economic
GDP growth, % development (proxied by GDP per capita), as developing states often have
higher trend growth rates.
Unemployment, % Sustained high unemployment risks undermining the country's growth potential.
Economic activity
Real investment Fast growth is a more positive factor than slow growth, especially for
spending growth, % developing states, but overly rapid expansion may generate investment bubbles.
Real household Fast growth is more positive than slow growth, especially for developing states,
spending growth, % but overly rapid expansion can lead to overheating.
A small amount of inflation is good, but high inflation and deflation can cause
Inflation, %
problems.
Monetary
indicators High real interest rates constrain investment, while very low or negative rates
Real interest rates,
suggest misaligned monetary policy. Our scoring system considers the position
%
of the economic cycle.
Excessive deficit spending can be a source of vulnerability and is penalised.
Fiscal balance,
Our scoring system does take into account whether the economy is growing
% of GDP
Fiscal indicators below trend.
Government debt, Excessive debt loads are a source of vulnerability as they reduce government
% of GDP policy flexibility and can lead to risks of a crisis.
Import cover,
The larger the better, though we are more tolerant of lower levels for states
months of goods
with a floating currency regime, as the currency’s ability to move acts as an
and services
automatic stabiliser.
imports
External indicators
External debt, High debt is a negative, and we also take into account three-year average debt
% of GDP as a percentage of exports (another distress indicator).
Current account, A large deficit is a negative, but our scoring system is more lenient if growth is
% of GDP above trend.
A long and deep local sovereign yield curve enables the government to
Local debt markets efficiently manage its local debt pile and provides corporates with local
benchmarks.
Local corporates and inward investors benefit from a wide variety of financial
market instruments that help them to better manage liabilities. Examples
Sophistication of
include interest rate swaps, forward rate agreements, interest rate futures,
financial market
cross-currency swaps and currency forwards. Not all products are available in all
currencies/markets.
Financial indicators Most countries have some form of restriction or regulations on the inflow and
outflow of funds. This can range from full capital controls, which impede local
Capital control risk
and foreign businesses, to relatively benign anti-money laundering regulations.
Businesses benefit from fewer restrictions.
Few states can source all of their budgetary financing needs from the domestic
market and instead need to access international credit or money markets.
External borrowing
States have varying degrees of access to foreign credit, given their perceived
capabilities
creditworthiness and credit history. The key proxy is the length of the foreign
currency debt curve of the government and/or key quasi-sovereigns.

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Operational Risk Index
Component Sub-Component Rationale
The availability of labour score takes into account the size of the
labour force, degree of urbanisation and basic literacy skills. A large
Availability of labour
labour force equipped with basic skills is advantageous to firms
choosing to operate in a country.
The skills sub-component focuses on secondary and tertiary schooling.
Scores are based on enrolment at each level of skills and interest in
Labour market risk Skills technical subjects, such as science, manufacturing, construction and
engineering. This gives an indication of the talent pool available in a
country and emphasises higher-value technical skills.
This sub-component assesses worker flexibility and the cost of hiring
in a particular country. It includes factors such as the minimum wage,
Cost of labour
severance pay and unemployment. The scores are calculated to
reward countries with the lowest hiring costs.
This indicator assesses the extent and quality of road, rail, air and
Transport network waterway transport networks within a country, which indicate capacity
and ability to transport raw materials and finished goods.
This indicator assesses the time and cost required to import and
export goods by container. In addition, a country's air freight volumes
Trade procedures and
and connectivity to shipping networks is used to gauge its potential
governance
as a shipping or freight hub. An ideal market would have strong freight
Logistics risk
connections and low levels of trade bureaucracy.
This indicator assesses the value and growth of imports and exports.
Market size is a proxy for a country's growth outlook and thus its
attractiveness to investors. For utilities we take into account electricity
Market size and utilities
and fuel costs, availability of water and internet penetration. A well-
developed utilities sector enables the smooth running of supply
chains.
Evaluates a country's openness to investment and trade as well as the
development of financial markets on the basis of imports, exports and
foreign direct investment. A country that is more open and has strong
Economic openness
financial markets is a better prospect for businesses, as it means firms
have access to more financing options, a better selection of imported
raw materials and can realise opportunities to sell overseas.
This score incorporates fiscal and trade barriers, such as corporation
tax, and the time taken to open or close a business. The scoring
Government
system favours countries where governments are more supportive of
Trade and intervention
businesses, with high fiscal spending, low tax rates and lower barriers
investment risk
to opening or closing a business.
This score reviews the rule of law and quality of information and
communications technology (ICT) governance. It takes into account
issues such as corruption, freedom of the press and rule of law. ICT
governance covers the protection of intellectual property, ownership
Legal
of financial assets and strength of legal governance in e-commerce
and digital signatures. A strong legal system, with patent protection
and a secure e-commerce network to connect with customers, is
essential for a business to be able to operate securely.

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Operational Risk Index (continued)
Component Sub-Component Rationale
This indicator assesses the risk of conflict in a country. Looking at
the interstate environment for that state and the region, and the
country’s military capability. This examines possible triggers for military
Conflict risk confrontation, factors that could mitigate conflict risks, multilateral
dispute resolution channels, military alliances and the size and
quality of a country's armed forces. This also looks at the threat from
terrorism, both domestic and international.
Crime and security risk
This indicator assesses the risk of crimes to the person and to
Vulnerability to crime property, from both a violent and petty crime perspective. It also
examines the capability and integrity of the police force.
This indicator assesses crimes that might specifically target businesses
such as organised crime and cyber crime. The indicator also assesses
Business crime
the potential cost of crime and violence to businesses, such as the
need for companies to pay danger or hardship pay.

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About BMI
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