Latest update: 13 February 2023
What is country risk? Why does it matter?
Country risk refers to the conditions that exist in a country that could lead to losses for investors. There are many different factors to consider but key ones include currency depreciation, political and regulatory changes, economic conditions, the reliability of the legal system, corruption, and respect for property rights. All of these factors can cause borrowers to default. Collateral assets can fall in value, and become difficult to sell or recover. Loan originators can lose their licences or become insolvent.
Country risk is probably the most under-analysed risk that exists for P2P investors right now. Some platforms like Mintos offer loans from more than 30 different countries. Most investors realise that some countries are higher risk than others. But which ones? And how much riskier? Many of our readers have asked us to analyse this, and our initial findings are below.
Investors have been impacted by country risks recently
In the past we have seen regulators in some countries cancel the licences of lenders operating in the country, seemingly without warning. This led to a huge increase in the rates of non-performing loans, as borrowers are much less likely to repay when they believe that a company is operating ‘without a licence’, even if they are still legally liable for their debts.
In Denmark, we have also seen political moves to cap interest rates at 35%. While we understand the political and ethical reasons for this, it essentially kills the business model of all payday/short-term lenders operating in the country almost instantly, as the high default rates and cost structure cannot be covered by a 35% interest rate. We have also seen similar moves introduced in Poland, with almost no warning to the lending industry. This shows that country risk is very real, and needs to be considered by all sophisticated P2P investors. It also shows that even wealthy, sophisticated countries like Denmark can take actions that are potentially negative for investors and businesses, instead taking the view that the social benefits are more important.
These factors are critical for P2P investors
Currency volatility and trends
What’s the risk here? There are now many P2P Loan Originators (‘LO’s’) from outside the Eurozone, that fund themselves from European P2P sites. They usually borrow funds denominated in Euros. But the actual underlying loans are issued in home currencies such as Polish Zloty, Russian Ruble, Georgian Lira, or Kazakhstani Tenge. That means the LO’s potentially carry big currency risks. If their home currency depreciates against the Euro, they could lose a lot of money. This risk can be addressed by entering into FX hedges. However hedging can be expensive for these LO’s, and their disclosures about the amount of hedging they are doing is usually nil or very poor. It seems to us that most non-Eurozone based LO’s operate with some degree of currency risk. This means that investors have some risk that the LO will become insolvent if the local currencies depreciate significantly against the Euro. That’s why we in the table below, we show the volatility against the Euro in the last 12 months (measured by % movement over the last 12 months from highest conversion rate to lowest) and also the overall change in exchange rate today versus 12 months ago.
Economic conditions
There is a strong correlation between economic conditions and the number of loan defaults. When an economy starts to fail, people lose their jobs, and businesses fail. These people and businesses are then quick to default on their loans. That’s why keeping an eye on economic conditions in a country is worthwhile before buying loans in a country. In the table below we have used GDP growth over the previous 12 months as a proxy for economic conditions. But there are many other metrics that can be used such as unemployment changes, forecast growth, and so on. The clear trend here is that economies in most emerging markets are growing much faster than in Europe. That is a positive factor for investors buying loans outside of Europe.
Sovereign risk
Sovereign risk is the assessment of whether the national government is likely to repay its debts. This risk is typically measured by two key metrics – credit ratings from bureaus such as S&P, and the yield that government bonds trade at. P2P investors are not buying government bonds, so why should they care about this? Firstly, government bond yields give a good indication of how risky a country appears to investors, and what the inflation expectations are. For example, we can see that a low risk country like Germany has a negative yield (i.e very, very low risk), a medium/high risk country like Russia has a yield of 6.9%, and a high risk country like Kenya has a yield of over 10%. Under the concept of the sovereign ceiling, investors nearly always expect to earn higher returns than government bond yields in each country if they are investing in other asset classes such as corporate debts. In the tables below, we show the 10 year government bond yields for each country, as well as a rating score, which is derived from external credit ratings (i.e Moodys, S&P). The credit ratings score comes from the excellent site Trading Economics. Yields were sourced from Bloomberg where possible, and other specialist sites if not available from Bloomberg.
Political, legal and cultural factors
How likely is it that a government will nationalise an industry or company? How reliable are the courts? How easy is it to run a successful company? How much corruption is there? Will the government introduce capital controls? These are all important questions investors should consider, that we could not possibly hope to analyse fully for each country that originates P2P loans. Luckily for us, there are some great sources available to provide us with shortcut answers to these questions. In the tables below we use two of the best and most closely followed sources available – the World Bank Doing Business Study, and the Euler Hermes Country Risk ratings.
Wealth of country
Where would you feel safer investing your savings? In Switzerland or Swaziland? We think the answer is clear. Why is Switzerland safer? There is a very strong correlation between country risk and the wealth within an economy and its people. Wealthy countries tend to (but not always) have stronger property rights, reliable legal systems and more stable economies. These are all things that matter deeply to credit investors. That doesn’t mean that less wealthy countries should be avoided. It just means that they are higher risk prospects, and the returns need to reflect this. In the tables below we show the GDP (in US Dollars) per person in each country.
Key country risk metrics
| Country | Currency volatility vs Euro | Currency change vs euro in 1 year | GDP growth | Sovereign credit rating | 10 year sovereign bond yields | World Bank DB score | Euler Hermes rating | GDP $ per person |
| Lower better | Higher better | Higher better | Higher better | Lower better | Higher better | AA best, D worst | Higher better | |
| Albania | 13.1% | 4.6% | -10.3% | 35 | NA | 67.7 | D | 6,493 |
| Armenia | 63.9% | 48.9% | -13.7% | 16 | NA | 74.5 | D | 4,966 |
| Austria | -10.4% | 96 | 2.98% | 78.7 | AA | 53,637 | ||
| Belarus | 50.8% | 8.2% | -0.2% | 28 | N/A | 74.3 | D | 7,302 |
| Bosnia & Herzegovina | 0% | 0.0% | 2.1% | 27 | N/A | 65.4 | D | 7,143 |
| Botswana | 12.4% | -6.9% | -24.8% | 70 | 4.5% | 66.2 | BB | 6,805 |
| Bulgaria | 1.6% | 0.0% | -10.0% | 60 | 5.6% | 72 | B | 12,221 |
| Colombia | 29.9% | -11.2% | -14.9% | 57 | 12.2% | 70.1 | B | 6,104 |
| Czech Republic | 8.8% | 2.7% | -8.7% | 83 | 4.52% | 76.3 | A | 26,821 |
| Denmark | 0.3% | -0.1% | -6.8% | 100 | 2.59% | 85.3 | AA | 68,007 |
| Estonia | -5.6% | 83 | N/A | 80.6 | AA | 27,943 | ||
| France | -13.8% | 92 | 2.83% | 76.8 | AA | 43,659 | ||
| Finland | -6.4% | 96 | 2.90% | 80.2 | AA | 53,654 | ||
| Georgia | 76% | 19.2% | -12.3% | 45 | 9.1% | 83.7 | D | 5,023 |
| Germany | -11.3% | 100 | 2.37% | 79.7 | AA | 51,203 | ||
| Indonesia | 15.1% | 0% | -4.2% | 60 | 6.9% | 69.6 | B | 4,332 |
| Ireland | -3.0% | 78 | 2.82% | 79.6 | AA | 100,172 | ||
| Italy | -17.7% | 61 | 4.21% | 72.9 | A | 35,657 | ||
| Kazakhstan | 30.6% | 1.1% | -1.8% | 56 | N/A | 79.6 | C | 10,374 |
| Kenya | 20% | -7% | 1.1% | 33 | 11.7% | 73.2 | C | 2,082 |
| Kosovo | -9.3% | N/A | N/A | 73.2 | N/A | 5,270 | ||
| Latvia | -8.9% | 73 | 4.6% | 80.3 | A | 21,148 | ||
| Lithuania | -4.2% | 75 | 4.65% | 81.6 | A | 23,732 | ||
| Mexico | 21.4% | 15.6% | -18.7% | 60 | 8.88% | 72.4 | BB | 10,045 |
| Moldova | 11% | 1.1% | -14.0% | 25 | NA | 74.4 | D | 5,230 |
| Namibia | 22.1% | -11.1% | -11.1% | 45 | 10.7% | 61.4 | C | 4,866 |
| Netherlands | -9.4% | 100 | 2.66% | 76.1 | AA | 57,768 | ||
| Nigeria | 22.9% | -4.2% | -6.1% | 30 | 14.2% | 56.9 | D | 2,065 |
| North Macedonia | 2.3% | 0.0% | -12.7% | 45 | N/A | 80.7 | C | 6,694 |
| Phillipines | 10.2% | 0.4% | -16.5% | 61 | 6.3% | 62.8 | B | 3,461 |
| Poland | 12.2% | -5.4% | -8.2% | 71 | 6.12% | 76.4 | BB | 18,000 |
| Romania | 2.9% | 0.9% | -10.5% | 55 | 7.55% | 73.3 | B | 14,848 |
| Russian Federation | 198% | 10.9% | -8.0% | 55 | 10.6% | 78.2 | D | 12,194 |
| Slovakia | -12.1% | 76 | 3.23% | 75.6 | A | 21,391 | ||
| South Africa | 21.7% | -10.9% | -17.1% | 46 | 9.87% | 67 | C | 7,005 |
| Spain | -21.5% | 71 | 3.4% | 77.9 | A | 30,103 | ||
| Turkey | 34.6% | -23.5% | -9.9% | 36 | 12.9% | 76.8 | C | 9,661 |
| Ukraine | 36.7% | -18.1% | -11.4% | 26 | NA | 70.2 | D | 4,835 |
| UK | 9.2% | -5.9% | -21.5% | 91 | 3.4% | 83.5 | AA | 46,510 |
| Vietnam | 13.7% | 2.7% | 0.4% | 43 | 4.25% | 69.8 | C | 3,756 |
| Zambia | 39.3% | -3.4% | -2.1% | 30 | 34.0% | 66.9 | D | 1,137 |
Note: All data is latest available of 13 February 2023.
Our Country Risk scores
Below we have scored each country based on the 5 variables we outlined above – currency strength, economic conditions, sovereign risk, qualitative factors, and wealth. We have provided a score out of 20 for each factor, with an overall score out of 100.
| Country | Currency | Economic conditions | Sovereign risk | Qualitative | Country wealth | Total | Last score change |
|---|---|---|---|---|---|---|---|
| Albania | 16 | 14 | 7 | 9 | 4 | 50 | -1 |
| Armenia | 12 | 18 | 3 | 9 | 3 | 45 | -2 |
| Austria | 20 | 10 | 19 | 17 | 18 | 84 | 0 |
| Belarus | 4 | 14 | 2 | 5 | 4 | 29 | -4 |
| Bosnia & Herzogivina | 16 | 18 | 5 | 9 | 4 | 52 | 4 |
| Botswana | 14 | 16 | 13 | 14 | 4 | 61 | 10 |
| Bulgaria | 16 | 12 | 12 | 13 | 7 | 60 | -1 |
| Colombia | 10 | 14 | 11 | 13 | 4 | 52 | 0 |
| Czech Republic | 18 | 10 | 17 | 16 | 14 | 75 | -1 |
| Denmark | 19 | 10 | 20 | 14 | 18 | 81 | -3 |
| Estonia | 20 | 8 | 17 | 17 | 14 | 76 | -8 |
| France | 20 | 10 | 18 | 17 | 18 | 83 | 1 |
| Finland | 20 | 8 | 19 | 13 | 18 | 78 | -8 |
| Georgia | 6 | 18 | 9 | 10 | 3 | 46 | 0 |
| Germany | 20 | 8 | 20 | 17 | 18 | 83 | -1 |
| Indonesia | 14 | 13 | 12 | 13 | 3 | 55 | 7 |
| Ireland | 20 | 8 | 16 | 17 | 18 | 79 | -9 |
| Italy | 20 | 10 | 12 | 15 | 18 | 75 | 3 |
| Kazakhstan | 12 | 12 | 12 | 12 | 6 | 54 | 4 |
| Kenya | 16 | 14 | 6 | 11 | 2 | 49 | -4 |
| Kosovo | 14 | 18 | 14 | 9 | 3 | 58 | 0 |
| Latvia | 20 | 10 | 15 | 16 | 11 | 72 | 3 |
| Lithuania | 20 | 8 | 15 | 16 | 12 | 71 | -4 |
| Mexico | 12 | 10 | 12 | 14 | 6 | 54 | 9 |
| Moldova | 16 | 6 | 5 | 5 | 3 | 35 | -16 |
| Namibia | 10 | 8 | 8 | 10 | 3 | 39 | -11 |
| Netherlands | 20 | 16 | 20 | 17 | 18 | 91 | 6 |
| Nigeria | 14 | 16 | 5 | 8 | 2 | 45 | 1 |
| North Macedonia | 14 | 16 | 12 | 12 | 4 | 58 | 1 |
| Phillipines | 16 | 14 | 12 | 12 | 2 | 56 | -5 |
| Poland | 18 | 14 | 14 | 7 | 9 | 62 | -1 |
| Romania | 16 | 14 | 11 | 13 | 8 | 62 | 1 |
| Russian Federation | 4 | 10 | 3 | 4 | 7 | 28 | -15 |
| Slovakia | 20 | 16 | 15 | 16 | 11 | 78 | 3 |
| South Africa | 12 | 14 | 8 | 11 | 4 | 49 | 5 |
| Spain | 20 | 10 | 14 | 16 | 16 | 76 | 3 |
| Turkey | 4 | 10 | 6 | 12 | 5 | 37 | -1 |
| Ukraine | 4 | 4 | 2 | 4 | 3 | 17 | -25 |
| UK | 19 | 10 | 18 | 17 | 18 | 82 | 2 |
| Vietnam | 16 | 14 | 9 | 11 | 2 | 52 | -5 |
| Zambia | 4 | 16 | 6 | 9 | 1 | 36 | 0 |
Country risk ratings are never perfect. You need to take your own view
The goal of this post is to provide P2P investors with some relevant data, risk factors to consider, and a framework to assess the relative risks between countries. Country risk assessments are always going to be subjective. There’s no right or wrong answers. Every investor should develop their own view on how important each factor is, and their assessment of each country. The key thing is to actually take a view one way or another. The number of potential countries to invest in has started to grow dramatically for P2P investors. It seems that many are now buying loans from countries which they have very little knowledge of. Hopefully the ratings above can help investors to make more informed decisions, and assess what is an appropriate yield to expect when investing in each country.
We also want to make clear that it is almost impossible for us, and anyone else, to closely follow relevant emerging regulatory and political developments in every country that originates P2P loans. Unexpected events can and will happen, as we have seen in places like Kosovo recently. Instead, the analysis above can simply help to identify the countries in which these unexpected adverse events are most likely to happen.
Over time, there will be an opportunity to refine and improve the above approach, add additional countries (requests in comments below!) and open a debate between investors.
Changes and updates
February 2023 – The most important updates reflect the impact of the Russian/Ukraine conflict, and significant changes to the interest rate environment. Prior to the conflict, Russia and Ukraine already had low country scores (43 and 42), reflecting that they were both higher risk locations. Other countries that have low and/or falling country risk scores with connections to the conflict include Moldova and Belarus.
September 2020 – we have fully updated all the data, including GDP changes, currency movements, and survey results from Euler Hermes and the World Bank. Currency movements have become significantly more volatile since our last update. Most emerging market currencies have depreciated against the Euro. The GDP data shown represents Q2 GDP compared to a year earlier. The large falls in most countries is obviously due to the impact of COVID-19. However there has been a considerable difference in impacts reported across countries. Our economic strength scores reflect performance over the previous 12 months so do not correlate directly with the GDP figures shown. Countries with notable emerging country risks include Belarus (political issues), Mexico (currency depreciation and COVID impacts), and Turkey (currency depreciation).
April 2020 – we have updated all the currency movements following significant volatility in the last month. Following this we have reduced several currency scores that have been experiencing significant depreciation in including Mexican Peso, Kazakh Tenge, and Russian Ruble. We have also cut the economic strength scores of Russia and Kazakhstan as we expect them to be heavily impacted by the dramatic fall in oil prices we are seeing. We lowered the qualitative score for Poland due to the emergency laws brought in to limit how much lenders can charge for a 12 month period beginning 1 April, which we think will call significant difficulties for many lenders there.
March 2020 – we have added some new countries – Netherlands, Nigeria, Bosnia & Herzegovina, Ireland and Slovakia. We’ve also changed the data provided relating to the World Bank Doing Business survey. We had previously shown global ranking, but we’ve now shown the score provided by the World Bank. We think this makes it easier to compare results between countries. We have not made any adjustments or changes to scores relating to the ongoing Cornonavirus situation but of course this should be monitored and considered.
Pingback: We've picked the best and worst P2P loans available right now
Also missing Uganda (LO Watu Credit Uganda on Mintos).
Thanks for your invaluable work!
Hey Oscar, any plans on keeping this updated?
Singapore is missing (Robocash loans)
I think it could be interesting to show the maximum interest rate allowed for personal loans (without collateral) by country. E.g. for The Netherlands it has recently been changed from 14% to 10%.
Bulgaria max APR: 50%
Current leftist government in Finland is very much against p2p and other high interest small personal loans.
They introduced 20% cap for loans pre-covid and at the same time limit what other fees and how much loan companies can charge.
Now during the covid times goverment adjusted the interest cap to 10% ..which pretty much killed the market of small loans without collateral.
Pingback: Our Mintos Lender ratings. We score each lender out of 100
You should update the currency risk of KZ and ID given the abysmal devaluation of their currencies during the last 2-3 weeks…
Thanks Mgtow- we’ve refreshed all the data and scores today. Agree things are looking much changed for KZ than a month or two ago.
Nice but Sweden is missing
Do you have any Swedish P2P loans?
Yes, Lendermarket 😛
Pingback: The Mintos CEO said 'ask me anything'. Here's what happened next
Good post, I find this very useful.
I have only two questions about the currency data and currency rating calculation algorithm:
Where do you get the currency volatily and exchange rate data from?
It raises some questions, for example Bulgaria has a currency board with a fixed rate against the euro since 22 years, I would expect these to be zero, but instead I see 2% for volatility and 0.4% for change.
Could you explain more about how do you calculate the currency risk rating? In the above example Bulgaria has a currency rating of 14, while UK has a currency rating of 19 with 13.2% volatility. I would expect more volatility against the euro to come with more risk and lower currency rating…
Hi Valeri. The currency data comes from google finance. We’ve used the raw data provided so would need to explore further why it reports slight changes on some days. We’ve probably been a bit harsh with Bulgaria and some other countries that have fixed exchange rates. The reason for not giving it full currency marks is that smaller countries tend to have fixed exchange rates against major currencies that can then suddenly revalue (usually downwards) unexpectedly. The score of 14 rather than 20 reflects this risk, but we may be being too harsh for sure. There’s also a higher risk of currency controls in these countries.
Thanks!
Sure, I expect the rating for the fixed exchange rate countries to be a bit lower than the ones having Euro as their currency. In the end every currency board is as strong as the currency reserves of its central bank.
I was just surprised to see how some floating currency course countries have an extraordinary high currency score of same or near the score of the euro countries. From my perspective (i spent my money in euro) every currency that has a floating course against euro has a risk of devaluating. Whether it will be a risk in loans for investing in that currency or a risk for the loan originators having denominated euro loans in that country. And that’s not even considering the political risks, like for example UK with its Brexit drama which is not finished yet is not much different than Russia with its currency depending on the oil price, first one has a rating of 19, the other one – 16. Czech republic and Poland not being in the eurozone and having floating courses but having a top rating of 20.
Hi Valeri we’ve updated the currency data today as there have been some big changes recently. We’ve also made some adjustments to currency scores where we have also taken into consideration some of the points you had made, which we thought were valid.
What about the Netherlands? Atlantis Financiers on Viventor is quite important. Thank you!
Thanks for sharing the data!
However, when I sorted the scores chart by total, I unexpectedly found Denmark at the first place!
This goes against your comment on Simbo that can be found in the LOs ratings page.
It states that “The Denmark government have recently announced measures to cap interest rates at 35%, and to also ban marketing of any loans with interest rates greater than 25%. The average rate of Simbo loans appearing on Mintos is over 200%. We therefore think that there is a high risk that Simbo may have to close down operations. In the meantime, we would exclude any Denmark loans from a Mintos portfolio.”
Could you please clarify your position?
First of all thank to you (ExplorerP2P team) for all the analysis, tips. etc., you give us. You do a great job.
I think that the indicators you are considering could be, from my point of view, extremly macroecomics and at least for a short term investement startegy not the better to choose one or other country,
My feeling is that people in mintos invest in loans with a short term.
Taking into account what I said above, I built my own country risk ranking using the minimum wage and the unemployment rate. Why I have chossen these indicators? Regarding unemployment rate, If you loose your job it would be more likely you cannot pay the loan. Regarding minimum wage: although you have a job if the ratio loan_payments/salary is “high” it could be more difficult to face those payments.
Anyway, I fully agree with the sentence “ratings are never perfect. You need to take your own view” because each investor has its own thinking, its risk aversion, etc.
Thank you again
Diego
P.S.: Kosovo is a no-go in my ranking due to unployment there is 24.5% 🙂
While i do appreciate the work which went into this, I wonder if you considered the political agendas in several countries around “loan sharks” where there is some significant pressure to either cap max interest rates, revoke licenses for these deemed loan sharks or loan originators working on somewhat fragile licenses as their business as such should be regulated but the legal situation being what it is, they operate outside of the regulated world and could be shut down over night (countries coming to mind on top of my head, Denmark, Philippines, Kosovo etc)
Hi Hieschen. Totally agree that these political factors are an important risk to consider. However as noted in the article it would be an impossible task for us to really cover the regulatory and political outlook in over 30 countries around the world. If we become aware of developments (such as recently in Denmark) that are important and material, we will try and highlight them.
Not sure if you have made some manual error – Bulgarian Lev is tied to Euro, so “Currency change vs euro in 1 year” should be zero, yet it seems from the table there has been some change (albeit small) and Botswana’s currency has a zero for that same parameter.
Hi, we used data from GoogleFinance for those figures. The Lev is tied to the Euro but there have been very small movements against it on certain days. For Botswana – when we ran the figures, the currency had actually moved 0% versus the Euro compared to 12 months previously
Thanks! Great post, ratings are very useful.
Waw thank you Oscar for this research and precious table ! 🙂
Kosovo over Bulgaria and Romania? Have you ever been in Kosovo?
Yeah, some of these figures are absurd and make me question the usefulness of all the data available here, especially LO ratings. They just don’t make sense
Instead of criticizing, why not be constructive, and provide your own data, if you are smarter… 🙂
I’m not criticizing explorep2p. I’m skeptical about the usefulness of the data itself since it’s obviously skewed in some cases – namely Kosovo and Botswana. I mean Iute and Monego’s bans were in december. Also remember Greece falsifying it’s financial stats? That wasn’t so long ago either
Wow amazing post, and is possible to use in all platforms to think about the country risk. Great work!! Thank you for this big effort!