Before investing in a particular country, a competent investor always calculates country risks. Nikolay Trifonov, academician of the International Academy of Engineering, told about what this means and why the premium for country risk can be useful not only for investors, but also for ordinary real estate buyers.
What is the country risk premium and how to calculate it?
The country risk premium (in English, country risk premium, CRP) is a premium for the risk of investing foreign funds in an investment project in a particular country associated with the loss (full or partial) of this project’s value due to general economic, financial and socio-political factors in that country.
— Knowing the level of country risk of a particular country helps an investor to assess the prospects of investments in a given direction, — said Nikolai Trifonov. — Indicators of the country risk premium are included in the formulas for evaluating the effectiveness of investment projects, as well as assessing the value of assets in this country, primarily enterprises.
For an ordinary buyer of real estate, it is important to know the level of the country risk premium in order to understand the real value of an apartment or house in a particular country on the international real estate market. Plus, if he plans to sell this property in the future, then this indicator will help him assess how likely he will be able to get into the “plus” with such a sale.
The level of country risk for Belarus
The public association “Belarusian Society of Appraisers” has been calculating the premium for country risk for Belarus since 2004.
— For almost 20 years now, we have been analyzing and calculating the investment attractiveness of Belarus every month. The premium for country risk is one of the most important indicators in these calculations,” explained Nikolai Trifonov. — In simple terms, the country risk is calculated on the basis of quotations of government securities on international markets. Belarus issues its fifteen—year Eurobonds (a type of long-term securities – approx.ed), which were once quoted in Europe.
Previously, Bloomberg sold information about the value of these securities on international markets to the Ministry of Finance of Belarus (and the Belarusian Society of Appraisers also received these figures). Plus, we studied open data on the long—term treasury obligations of the US government from the US Federal Reserve System – this is important because the premium is calculated against the US dollar. As a result, the country risk for Belarus was calculated, roughly speaking, as the yield of Belarusian securities minus the yield of American securities with the same maturity. In fact, according to a slightly more complex formula, which is given above, but this explanation is enough to understand the overall picture.
An interesting fact is that 2020 has had virtually no effect on the level of country risk for Belarus. At that time, the country risk premium was estimated at about 8%. This is not the best indicator, but it is quite acceptable — Bloomberg classifies such countries as category B in terms of risk level. For comparison, in the UK this figure is about 1-2%, and this is category A. And in the USA, the country risk premium for the dollar is zero, because dollars are printed there.
At the same time, February 2022 became a turning point for Belarus’ country risk indicators. According to our calculations, in just a month this figure jumped to 94.5% (based on information from the Frankfurt Stock Exchange). For the real estate market, this meant that Belarusian real estate instantly depreciated.
Starting from the same year, European exchanges stopped working with Belarusian securities, which means that it has become much more difficult to calculate country risk indicators for Belarus. However, I began to focus on Asian markets where securities are still quoted, albeit at a large discount. Based on these data, it can be said that country risks for Belarus are decreasing, and at the beginning of 2024 they were at the level of 25%. We can say that the situation is improving, but we need to understand that 25% is still a dangerous indicator, according to financiers, a default zone. To put it very simply, it is possible to invest money in such a country for only 4 years, and it is difficult to predict what will happen after that. If the indicator is 90% or higher, then it is dangerous to invest money for a year.
What factors influence the value of real estate? How does country risk affect the assessment? Nikolai Trifonov told about this and not only in this podcast:
Author
Nikolay Yuryevich Trifonov REALTING Chief Advisor
Full member of the International Academy of Engineering, foreign member of the Russian Academy of Engineering, Honorary Appraiser of the Republic of Kazakhstan, Senior member (Fellow) Of the Royal Institute of Privileged Real Estate Specialists (Great Britain), Associate Professor, Candidate of Physical and Mathematical Sciences, honorary member of the Society of Kyrgyz Appraisers, the Portuguese Association of Appraisers of Fixed Assets, the Eastern European Union of Experts (Germany), author of the books “Theory of valuation” and “Comprehensive valuation of real estate”. In 1994, he created the Belarusian Guild of Real Estate Specialists, which brought together the largest private and public participants in the real estate market and privatization in Belarus. In 1994, 1995 and 1996 he held international real estate fairs in the CIS countries. He was one of the organizers of the Western Real Estate Exchange. In 1996, Nikolai created and headed the public association “Belarusian Society of Appraisers” (BOO). From 1998 to 2005, he was elected a member of the Board of the European Real Estate Society (ERES), Director with extended powers – responsible for Central and Eastern Europe. In 2003, he was elected Director General of the Council of Associations of Appraisers of the CIS (since 2011 – the Council of Associations of Appraisers of Eurasia). From 1994 to the present, he has been an expert in various working and expert groups of the United Nations Economic Commission for Europe (since 2014 – in the Group of Advisers on the Real Estate Market). From 2010 to the present, he has been a representative of the BOE in the Council for International Assessment Standards (IVSC).
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