Is country risk assessment an exact science?

Certainly not. There is no way that it can
be.

In order to exactly determine the level of risk associated with
any particular country, it is necessary to determine the likelihood of all possible scenarios
that might have an impact on a firm that invested in that country. This is clearly impossible to
do in any exact way. Let us take two examples to show why this is
so.

First of all, let us look at the example of Egypt. Before the
start of this year, very few people would have said there was much risk of the Mubarak government
being overthrown. Therefore, Egypt would have been seen as a politically stable country. Even if
someone did think that Mubarak might be overthrown, it would be extremely difficult to put an
accurate number on that likelihood. You cannot really say that there is a 60% chance (as opposed
to a 50% chance) that a country's government will be overthrown. Therefore, it is impossible to
exactly define how much political risk there is in a country like
Egypt.

Second, look at Japan and the impact of the earthquake and
tsunami. This was a natural event, not a human one, and should therefore be easier to forecast.
However, there is no way to accurately assess the risk of such a disaster happening in any given
year or decade. Scientists don't know with any specificity when an
earthquake will happen or where or how strong it will be. This makes exact assessment of risk
impossible.

There are too many things that can happen to affect a
firm's investment in a country. The variety of things that can happen make it impossible to
exactly assess the level of country risk.