Country risk ratings in an age of geopolitical upheaval and climate change

As geopolitical tensions escalate and climate risks intensify, reliable country risk ratings are vital to maintaining confidence in global finance. These ratings cut through complexity by translating political shocks, institutional strength, and economic resilience into market ready signals. For lenders, exporters, and investors alike, they provide the clarity needed to price risk fairly, guide capital flows, and support sustainable growth in global markets.

The early 2020s have seen geopolitical competition intensify, with trade wars disrupting established patterns, supply chains being re‑engineered, and both interstate and intra‑state conflicts reshaping regional dynamics. Political coups are becoming more frequent, while the security of energy, food, and critical minerals has returned to the forefront of international politics. From war in Europe to tensions in the South China Sea, from climate‑driven shocks to abrupt changes in trade policy, the geopolitical risk map is in a state of flux not seen since the end of the Cold War.

In this fast‑changing and increasingly uncertain environment, global trade and investment rely on sober, evidence‑based assessments of creditworthiness abroad. Accurate, unbiased country risk ratings distil political, economic, and institutional factors into an actionable measure of a nation’s ability and willingness to meet external obligations and sustain investor returns. Particularly in times of heightened uncertainty around cross‑border commerce, they serve as a common reference point, enabling exporters to ship goods, banks to extend credit, and investors to commit capital—even in unfamiliar or volatile markets.

Country credit ratings: A cornerstone of global trade finance

In a world where trade and investment transcend national borders and serve as key drivers of growth and development, country credit ratings provide the bedrock for cross‑border finance. They offer a structured, data‑driven assessment of a nation’s ability and willingness to meet external debt obligations and safeguard foreign direct investments. These ratings are published both by public bodies, including the OECD Participants to the Arrangement on Officially Supported Export Credits, and by private agencies that issue sovereign ratings. Their importance lies in the fact that they provide lenders and exporters with a consistent measure of country risk, enabling capital to flow into international markets with greater confidence.

“Country risk,” in this context, covers the full spectrum of risks arising from the foreign location of a borrower or investment. Under the OECD Participants’ Arrangement, this includes transfer and convertibility risk: the danger that government actions such as exchange controls prevent conversion of local currency into foreign exchange or restrict fund transfers abroad—often an outcome of a weakening economy. It also covers force majeure risk: disruptions such as war, revolution, or civil unrest that lie beyond the borrower’s control. Closely related, though narrower in scope, is the risk of sovereign moratorium, in which a government or central bank suspends repayment on its obligations.

Thus, at their core, country credit ratings encapsulate creditworthiness. The outcome of these ratings directly influences borrowing costs: higher assessed risk leads to higher premiums and interest rates. The OECD Arrangement makes this principle explicit, requiring that premiums be risk‑based, converge across participants, and remain sufficient to cover long‑term operating costs and losses. In practice, this reflects the foundational tenet of risk management: premiums must always be adequate to cover expected losses.

Private lenders, risk insurers, and public‑sector Export Credit Agencies (ECAs) all rely on robust country credit assessments. Although government‑backed, ECAs operate on the commercial side of cross‑border financing. Their purpose is to support viable trade and investment transactions, particularly in higher‑risk markets where private lenders may hesitate to act alone. At the same time, ECAs are subject to clear constraints. They must remain financially self‑sustaining over the long term, and are prohibited under WTO rules from subsidising national exporters. Their mandate is to facilitate trade flows, not provide foreign aid. To ensure transparency and consistency, the OECD country risk classification functions as a public good. It provides comparable assessments of higher‑risk emerging and frontier markets by quantifying the probability of non‑payment in hard currency in the long term, whether due to government policy actions, political instability, or economic shocks. By standardising how risk is measured, the system offers both ECAs and private market participants a common reference point. This allows credit to be priced appropriately, mitigating losses while guarding against unfair competition.

Modelling country risk: The methodology underpinning country credit ratings

Constructing a country credit rating is a rigorous analytical exercise. Under systems such as the OECD Participants’ Country Risk Assessment Model (CRAM), models are built on cross‑country historical data on external and sovereign defaults (including ECA’s payment experience). They estimate the probability of default over the medium to long term and are supplemented by expert judgment in cases where quantitative indicators cannot fully capture qualitative or emerging risks.

In the short run, liquidity indicators—such as export revenues relative to debt‑service obligations or the adequacy of foreign‑currency reserves—are central to assessing repayment capacity. Over longer horizons, however, typical of official export credits with maturities of 10–15 years or more, structural factors assume greater importance. Key among these are the following:

• economic resilience, diversification, investment capacity, and indebtedness;
• sound macroeconomic management and fiscal discipline;
• political stability (domestic and international); and
• institutional quality (the strength of legal, regulatory, and administrative frameworks).

Development economics underscores the central role of institutions for long-term risk. As economists and Nobel laureates Daron Acemoglu, Simon Johnson, and James A. Robinson have demonstrated, robust institutions form the backbone of long‑term prosperity—and, by extension, long‑term credit reliability. Recent IMF[1] studies reinforce this pattern, showing that weaker institutional quality largely explains why Sub-Saharan sovereigns are rated more harshly than comparable peers elsewhere—a reminder that institutional reform remains the most durable path to lower risk and cheaper financing.

Adapting to emerging risks

As global conditions shift, the methodologies underpinning country credit ratings must adapt. The international system is moving from a unipolar order dominated by a single power, the US, toward a bipolar or multipolar environment, in which the US, China, and other major powers increasingly shape international outcomes in competition with one another. This shift has heightened security rivalries and made episodes of geopolitical tension and conflict more frequent in the 2020s, contrasting sharply with the relative stability of the post–Cold War decades. While geopolitical risk has always been central to country assessments, its evolving nature now demands a more systematic integration into credit rating methodologies. The intensification of climate change adds another structural dimension. Countries highly exposed to extreme weather events, rising seas, or resource stress face heightened vulnerability—though the scale of the impact on national creditworthiness is often mediated by their capacity to anticipate such risks and adapt effectively. Models like CRAM are therefore subject to periodic review, ensuring that new emerging risks are reflected in assessments and that methodologies remain relevant in a rapidly changing global landscape.

Why accuracy and credibility matter

To sum up, accurate and credible country risk ratings are indispensable for mobilising medium‑ to long‑term export credits and other forms of commercial financing. This is especially vital in today’s more complex geopolitical environment. Ratings allow lenders to price risk appropriately, enable exporters to enter new markets, and create the transparency on which private investment decisions depend. In doing so, they support sustainable long‑term growth and development in emerging and frontier economies.

By tracking changes in country risk over time, these assessments also provide early signals of improvement or deterioration, enabling proactive risk management on both sides of the transaction. They are not abstract numerical scores; they are practical tools that translate complex political, economic, and institutional realities into actionable financial risk assessments. In a globalised economy, the impartial application of country risk ratings is therefore essential: sustaining trade flows, fostering investment, and ensuring that risks are recognised, measured, and appropriately matched with returns.