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The highest increases in
Country Risk Premiums (CRP) - the additional investor rate of
return needed to compensate for the financial impact of country
risk - were in the hydropower, manufacturing, and automotive
sectors for this third-quarter update. Projects in these sectors
face higher costs primarily as a result of a reduction in domestic
demand and the imposition of restrictions on cross-border capital
flows.
Projects based in the Gulf region have seen a significant
improvement in their CRPs since the second-quarter update, driven
by an improvement in contract sanctity, stemming from an increase
in oil revenues, supporting governments' commitment to advancing
key projects. Saudi Arabia, the United Arab Emirates, and Qatar
recorded among the largest improvements in their CRPs for the
third-quarter update.
Conversely, Sri Lanka recorded one of the largest deteriorations
in the CRPs since the second-quarter update, increasing by 4.78
percentage points to 6.86%. The increase in Sri Lanka's CRP was
driven by rising costs of strikes and protests, as well as
recession, in response to major political and economic dislocation
this year.
Business environment improves for Emirati solar power
projects.
Rising oil revenues have increased the likelihood that federal
projects supporting the UAE's energy transition plans will continue
with a lower risk of cancellation. Inflationary pressures are
reflected by a marginal increase in the labour costs, yet they are
outweighed by the revenue generated from improvements in domestic
demand for energy. The CRP for a solar power project in the UAE has
reduced by 0.2 percentage point to 0.8% since the second-quarter
update. CRIM estimates that the expected internal rate of return
(IRR) for a hypothetical USD250-million acquisition of a solar
power project in the UAE is 11.29%, after accounting for a 1.52%
loss in the IRR because of country risk.
Ethiopian hydropower projects face rising hard-currency
risks.
The prolonged suspension of direct external budgetary support to
Ethiopia is likely to increase pressure on foreign reserves. This
foreign-exchange shortage would result in a higher risk of
restrictions being tightened on the repatriation of profits and
ability of developers to access hard currency. The CRP for a
hydropower project in Ethiopia has increased 0.8 percentage point,
with an additional 4.6% rate of return needed to compensate an
investor for the financial impact of country risk. The expected IRR
for a greenfield, 25-year hydropower project is 7.7%, after
accounting for a potential 4.6% loss in the IRR caused by country
risk.
More about our County Risk Premiums
A key metric that should guide investment decisions is the
country risk premium (CRP): the additional returns a project must
generate to cover the risks arising from its particular operating
environment. Our Country Risk Investment Model
(CRIM) integrates the full spectrum of commercially relevant
political, economic, legal, tax, operational, and security risks
and models their impact on future cash flows by sector, and by
project phase (development, production, and income), across 153
unique geographies.
Posted 02 September 2022 by Chris Suckling, Associate Director, Risk Quantification, S&P Global Market Intelligence
This article was published by S&P Global Market Intelligence and not by S&P Global Ratings, which is a separately managed division of S&P Global.
