TNAG-2409-FCO40-3503-Hong-Kong-Port-and-Airport-Development-Strategy-(PADS)-Brit-1992 — Page 284

measure the ability of the portfolio as a whole to withstand the collapse of any single market. SCRPS are determined by the probability of default which is mainly derived from an economic

analysis of the risk of rescheduling. Other political risks

are also taken into account via the

the assumptions made in the

balance of payments forecasts and the adjustments made to

reflect political uncertainty. PMS exposure controls thus

address political risk in the widest sense ie all political and

economic risks on a market which will potentially affect all

cases in the market concerned. The key point is that political

risks may affect all cases on a market. The rescheduling risk

is the most significant but not the only political risk.

7

The problem is, however, that not all political risks are

the same and the likelihood of a market-wide default will vary

significantly according to the type of risk. For example, cash

contracts, with credit terms under 365 days will normally

escape rescheduling but there are some examples where ECGD has

paid substantial claims, notably on Nigeria. Similarly, local costs payable in local currency do not involve the foreign

exchange risk and are likely to escape rescheduling.

Nevertheless, there is a possibility, albeit much reduced, that

other political events will lead to a default in the payment of

such costs.

8 We have concluded that rather than try and apply a simple

"count/not count" approach to each category of

of exposure it

would be more logical to count everything but to apply a

weighting to reflect the different degrees of risk. This approach would overcome the illogicality of not counting at all

certain risks which clearly are not totally immune from

political risks and the equally undesirable result of counting

at 100% risks which are clearly less vulnerable to political risks than others. The concept of weighting is not

the

Stock Control Review Points are also effectively weighted to

reflect risk as measured by the

the probability of default;

the