Uncertainty avoidance and country-risk ratings

Country risk ratings have been relied on by international financial institutions and governments as tools for making investing decisions such as credit assessment, portfolio management and general provisioning against risk since the late nineteenth century. These ratings are based on formulas that weigh political, economic and financial components such as conflict, degree of lawfulness, corruption, and ethnic or religious tensions as a means of predicting payment problems by sovereign borrowers. These formulas do not include purely cultural factors. Inclusion of a related cultural factor such as a population’s propensity to seek explicitly defined rules and highly structured organizations could increase the effectiveness of country risk ratings in predicting a nation’s economic performance as measured by economic indicators that have been shown to be related to the risk of sovereign debt default. Utilizing Pearson’s Correlation and multiple linear regression, this study’s results show that the introduction of Hofstede’s Uncertainty Avoidance Score as a cultural factor will improve the ability of Euromoney and International Country Risk Guide country risk ratings to predict economic indicators associated with the risk of sovereign debt default.