In general, many of these variables are relatively stable over time, and paint a fairly static picture of the overall macroeconomic stability of the country. For many emerging markets, the publication of much of this data is on a quarterly or annual basis, and is produced often with a substantial lag (the variance in data quality and publication speed is large). For those countries that have readily available market data (price related data such as interest rates), the picture can be refined more accurately.

While these macroeconomic variables form a crucial part of the ranking system for assessing country risk, most of the investors stress the more subjective criteria (more difficult to quantify) in their models. For example, political stability is considered a critical variable in the models, though it is difficult to assign a numerical value to quantify it. There is some outsourcing of the data inputs for these kinds of variables,<sup>5</sup> but often the investment team creates its own scale and assigns values to each country. Other subjective criteria used in the framework include human rights variables, some indicator of corporate governance, and forecasts of economic performance in the coming years.

The method of aggregating the variables to create an overall score creates discrepancy among different model types. Rather than introduce another level of subjectivity, some of the investors merely equally weigh all inputs to create a relative ranking score. On the contrary, others weigh more heavily the variables they deem most important; most often these are the forward-looking indicators.

At the end of the process, each country has a risk ranking score. In most cases, this score serves as a first check for whether the fund should be in the country. However, the score is more often used to contrast with a valuation measure for either equities or bonds in order to judge whether a country (or investment) is attractive on a risk/reward basis. Though all investors who use these models assert that the risk score is an integral part of the investability decision, it is not decisive. The investor always has the ability to overrule the results based on his/her own subjective opinion of the quality of the investing story.

Generically speaking, the investment process as it relates to country choice can therefore be summarized for most investors in our group as a four-stage process. First, data is gathered and put into general macroeconomic fact sheets, and in most cases, crunched through an econometric model to produce a country risk score. Thanks to the recent quantification of many subjective indicators relating to such areas as political and labor issues, these criteria can often be included in the statistical analysis. Second, the country scores are compared by the investment committee

> 5 For example through specialized consultants, such as Political Risk Services, Wilshire Associates, KLD Research & Analytics, etc.; through use of specialized information providers such as, the Economists Intelligence Unit (EIU), Business Monitor International, Freedom House, ILO, the Global Corporate Governance Forum, Transparency International, the World Bank and the IMF; or to the rating industry which has started corporate governance ratings. An increasing number of independent firms are creating indices of political stability, corruption, and human rights, which were incorporated into almost every quantitative risk-scoring model to which we were exposed.  The steadily increasing number of consultants and data providers covering these specialized topics shows the increased importance investors and policy makers place on adherence to a wide range of global standards.

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