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FRM Part I · FRM Exam Part I · Country Risk: Determinants, Measures, and Implications

Which of the following is the most accurate description of how a country's dependence on a single commodity affects its risk profile?

Dependence on one commodity raises country risk because price swings produce large fluctuations in export earnings, government revenues and economic growth. The lack of diversification makes the economy and public finances vulnerable, increasing the likelihood of fiscal stress, currency pressure and sovereign default.

  1. AIt lowers risk because concentrated exports simplify trade policy
  2. BIt raises risk because commodity price swings can cause large swings in export earnings, government revenues and growthCorrect
  3. CIt has no effect once the country has a sovereign credit rating
  4. DIt affects only inflation, not growth or fiscal balances

Explanation

Economies concentrated in one commodity lack diversification, so price falls hit exports, fiscal revenue and GDP together, increasing default and currency risk. A rating reflects this risk rather than removing it, and the effects go well beyond inflation.

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