Country Risk Index Fitch Solutions’ Country Risk Index (CRI) Provides a Composite Score from 0 (Low) to 100 (High), Based on Our Five Individual Risk Indices

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Country Risk Index Fitch Solutions’ Country Risk Index (CRI) provides a composite score from 0 (low) to 100 (high), based on our five individual risk indices:

• Long-Term Political Risk • Short-Term Political Risk • Long-Term Economic Risk • Short-Term Economic Risk • 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 mean average of six risk index components: 2 Political Risk indices, 2 Economic Risk indices (in each case there is one Short- and one Long-Term Index) to reflect the different timeframes and types of political, security and economic risks that investors are exposed to in a 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. Operational Risk is given a double weighting in the CRI to account for the fact that this index is not broken down into short-term and long-term. This is because, unlike Economic and Political Risk, Operational Risk assesses the status quo, rather than Fitch Solutions’ projections for the coming years. It is an assessment of the current state of affairs in the business environment and how this affects investors’ ability to operate within a given market. To increase visibility of the key areas of risk – which again may vary from client to client – each Index is divided into sub-components, which are weighted according to their respective importance in terms of impacting stability and the overall investment climate.

Long-term Economic Risk, 1.%

Operational Risk, .%

Short-term Economic Risk, 1.%

Short-term Long-term Political Risk, Political Risk, 1.% 1.%

www.fitchsolutions.com Political Risk The Political Risk Indices evaluate the risk of a sharp change in government policy and broader political stability. Our definition of ‘long-term’ is not fixed, but is understood to mean a decade-long period. Our definition of ‘short-term’ is the current and subsequent year, i.e., a one- to two-year period.

Long-Term Political Risk Index (LTPRI) Short-Term Political Risk Index (STPRI) The Long-Term Political Risk Index assesses a country’s structural The Short Term Political Risk Index assesses pertinent political risks political characteristics based on our assumption that liberal, to investment climate stability over a shorter time frame, up to 24 democratic states with no sectarian tensions and broad-based months forward. The STPRI components are best viewed as Fitch income equality exhibit the strongest characteristics in favour of Solutions’ assessment of whether the government can deliver its political stability, over a multiyear timeframe. It is Fitch Solutions’ chosen agenda, without facing civil unrest, gridlock in policy making, view that this offers a template for greater long-term stability as or regional external threats within the short to medium term. (a) opposition to the incumbent government can be resolved The STPRI’s four components are: within the existing system; (b) the elected elite has sufficient power to govern (i.e., enforce its policies within the state’s territory), • Policymaking process (25%) – This assesses the and (c) there are only limited existential threats to the prevailing government’s ability to propose, pass and implement its policy. constitutional order from an alternative world view. Broadly speaking, it addresses how the characteristics of the polity constrain/enable the executive. The LTPRI’s four components are: • Social stability (25%) – This evaluates the short-term risks • Characteristics of polity (30%) – This assesses how well the posed by any weaknesses in the economy or society via institutions of the state cohere with a liberal democratic state unemployment, inflation and public unrest. with strong, formally separate institutions and safeguards to • Security/external environment (25%) – This evaluates protect minority rights. threats to the government’s ability to act as sovereign arising • Characteristics of society (30%) – This assesses the state’s from direct challenges to its rule; terrorism and armed income distribution, poverty levels, and ethnic characteristics. secessionism, regional tensions; and constraints on its actions • Scope of state (20%) – This evaluates the government’s ability by multilateral agencies/major powers. to act as sovereign, i.e., both on a domestic and external basis. • Policy continuity (25%) – This is directly linked to the • Policy continuity (20%) – This component assesses the corresponding LTPRI. Here, we assess likely policy continuity and stability of policy direction over a decade-long period, which for make explicit reference to the electoral cycle, and the risks of an most states will encompass a change of government. un-constitutional transfer of power (e.g., coup or popular uprising).

Political Risk Index (100%)

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

Characteristics of Polity (0%) Policy-making Process (%)

Characteristics of Society (0%) Social Stability (%)

Scope of State (0%) Security/external Environment (%)

Policy Continuity (0%) Policy Continuity (%)

www.fitchsolutions.com 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 Fitch Solutions’ 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 of The STERI seeks to define current vulnerabilities and assess real economic growth, the labour market, price stability, exchange rate GDP growth, inflation, unemployment, exchange rate fluctuation, stability and the sustainability of the balance of payments, as well as balance of payments dynamics, as well as fiscal and external debt fiscal and external debt outlooks. The Index is calculated by looking credentials over the coming two years, using the current year as at the previous five years of economic data and our forecasts for a reference point. This skews the STERI in favour of economies the next five years. A number of other structural factors are also with low twin deficits (current account and fiscal) or surpluses, taken into account, including dependence on the primary sector, low inflation and higher growth rates. There is also a subjective reliance on commodity imports, reliance on a single export sector, component, which measures the perceived independence of the and central bank independence. central bank in 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 and on a single sector or trade partner, as well as past growth unemployment rates. volatility. • Monetary (12.5%) – This evaluates inflation and real interest • Economic activity (17%) – This evaluates the recent history rates. of growth and unemployment. • Fiscal (12.5%) – This evaluates the fiscal balance, government • Monetary (8%) – This evaluates inflation and real interest rates. debt load and size of the tax base. • Fiscal (8%) – This evaluates the fiscal balance, government • External (25%) – This evaluates current account and external debt load and size of the tax base. debt dynamics, and the state’s ability to finance deficits. • External (17%) – This evaluates current account and external • Financial (25%) – This evaluates the sophistication and depth debt dynamics, and the state’s ability to finance deficits. of the local financial market. • Financial (17%) – This evaluates the sophistication and depth of the local financial market.

Economic Risk Index (100%)

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

Structure of Economy (%) Economic ctivity (%)

Economic ctivity (1%) Monetary (1.%)

Monetary (%) Fiscal (1.%)

Fiscal (%) External (%)

External (1%) Financial (%)

Financial (1%)

www.fitchsolutions.com Operational Risk Our Operational Risk Index quantitatively compares the challenges of operating in 205 countries worldwide. The index scores each country on a scale of 0-100, with 100 being the lowest 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 the best. 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 size, • Logistics: evaluation of the quality and extent of the transport education levels and costs of employing workers in a country. infrastructure, ease of trading, and quality and availability of • Trade and Investment: evaluation of the openness of an utilities. economy, level of government intervention and the quality and • Crime and Security: evaluation of operating conditions with efficacy of the legal environment. respect to interstate conflict risk, terrorism, crime, 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%

www.fitchsolutions.com Breakdown Of Risk Index Components Long-Term Political Risk Index

Component Sub-Component Rationale Established democracies are inherently more stable over the long term, as System of government unsuccessful governments can be removed within the rules of the existing political system. Systems based on written constitutions, which formally enshrine the Characteristics of polity separation of powers and safeguard against elite/majority dominance, Constitutional framework offer better protection for civil liberties. Again, this reduces the appeal of revolutionary change. The state’s ability to protect its citizenry – and to do so without discrimination Rule of law – is the cornerstone of a successful polity. Income distribution Income equality reduces the risk of social polarisation. Low poverty rates are a sign of a successful state and functioning polity. High Poverty poverty indicates the state is unable to fulfil its functions. Characteristics of society A high proportion of ethnic/religious minorities has potential to generate instability, especially if there is a history of tension or violence, as it suggests Minorities that significant numbers of citizens are not committed to the current political or constitutional order. The government’s ability to enforce policy within its territory is a major Domestic constraints Scope of state characteristic of a strong polity. External constraints This evaluates external threats to a government's sovereign power. Policy continuity is a benefit for investors and suggests a lack of polarisation Policy continuity Policy continuity within the political system.

www.fitchsolutions.com Short-Term Political Risk Index

Component Sub-Component Rationale The leadership's ability to agree on policy and to do so unchallenged by other Policy formation individuals/institutions increases policy predictability. The leadership's ability to legislate successfully again increases policy Policymaking process Policy enactment predictability. The ability to govern across the state ensures policy transparency and policy Policy enforcement predictability. Unemployment These are proxies for economic health. An economic downturn may limit the government’s policymaking latitude and increase opposition at enactment/ Inflation Social stability implementation. This is considered a symptom of social tension, which limits the government's Public unrest ability to implement policy. The government’s ability to implement policy may be constrained by Security threats terrorism, armed separatism, or guerrilla warfare. Regional tensions (e.g., caused by territorial disputes or military imbalances) may affect policymaking directly via government policy to counter any threat, Regional profile or indirectly via the exacerbation of existing domestic threats. In either case, government latitude is limited. Security/external threats The degree to which other states or state bodies affect the government's ability to determine policy varies. When assessing this, we consider economic policy commitments agreed as part of an IMF programme or disruptive International constraints policy adjustments demanded via membership of an economic bloc (e.g., the eurozone); we also include international sanctions and overt external attempts to remove the government. This measures risks to policy continuity arising from the normal channels to Constitutional change changes in leadership (e.g., election, succession). Policy continuity This measures the risk of an unconstitutional transference of power; for Unconstitutional change example, a popular uprising/revolution, coup or civil war.

www.fitchsolutions.com Long-Term Economic Risk Index

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

www.fitchsolutions.com Long-Term Economic Risk Index (continued)

Component Sub-Component Rationale 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 financial include interest rate swaps, forward rate agreements, interest rate futures, 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 Capital control risk 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 or money External borrowing markets. States have varying degrees of access to foreign credit given their capabilities 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.

www.fitchsolutions.com Short-Term Economic Risk Index

Component Sub-Component Rationale Strong growth is generally a positive. Scores are weighted by economic development GDP growth, % (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 developing states, spending growth, % but overly rapid expansion may generate investment bubbles. Real household Fast growth is more positive than slow growth, especially for developing states, but spending growth, % overly rapid expansion can lead to overheating. Inflation, % A small amount of inflation is good, but high inflation and deflation can causeoblems. pr

Monetary indicators High real interest rates constrain investment, while very low or negative rates suggest Real interest rates, % misaligned monetary policy. Our scoring system considers the position of the economic cycle. Fiscal balance, % of Excessive deficit spending can be a source of vulnerability and is penalised. Our scoring GDP system does take into account whether the economy is growing below trend. Fiscal indicators The larger the better, though we are more tolerant of lower levels for states with Government debt, % a floating currency regime, as the currency's ability to move acts as an automatic of GDP stabiliser. Import cover, High debt is a negative, and we also take into account three-year average debt as a months of goods percentage of exports (another distress indicator). and services imports External indicators External debt, % of A large deficit is a negative, but our scoring system is more lenient if growth is above GDP trend. Current account, % A long and deep local sovereign yield curve enables the government to efficiently of GDP 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 include interest Local debt markets rate swaps, forward rate 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 inflow and outflow Sophistication of of funds. This can range from full capital controls, which impede local and foreign financial market businesses, to relatively benign anti-money laundering regulations. Businesses benefit Financial indicators 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. States have Capital control risk varying degrees of access to foreign 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. External borrowing Strong growth is generally a positive. Scores are weighted by economic development capabilities (proxied by GDP per capita), as developing states often have higher trend growth rates.

www.fitchsolutions.com Operational Risk Index

Component Sub-Component Rationale The availability of labour score takes into account the size of the labour force, Availability of labour degree of urbanisation and basic literacy skills. A large labour force equipped with basic skills is advantageous to firms choosing to operate in a country. The education sub-component focuses on secondary and tertiary schooling. Scores are based on enrolment at each level of education and interest Education in technical subjects, such as science, manufacturing, construction and Labour market risk 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, severance Cost of labour 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 waterway Transport network 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 and connectivity to Trade procedures and shipping networks is used to gauge its potential as a shipping or freight hub. governance Logistics risk An ideal market would have strong freight 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 Market size and utilities to investors. For utilities we take into account electricity 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 financial Economic openness 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 system favours Government intervention countries where governments are more supportive of businesses, with Trade and investment risk high fiscal spending, low tax rates and lower barriers 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 of financial assets Legal 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.

www.fitchsolutions.com 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 confrontation, Conflict risk 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 property, from Vulnerability to crime 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 the potential Business crime cost of crime and violence to businesses, such as the need for companies to pay danger or hardship pay.

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