Country risk premium
The freely accessible sample of the KPMG Valuation Data Source provides an overview of the current country risk premiums. The country risk premium is also presented quarterly for changing sample countries over time. Through our database, we provide you with free and user-friendly access to up-to-date and reliable capital market data.
Country risk premium as at 07/31/2023
The current country risk premium for the BBB rating as at xx/xx/2023 is: 5.3%. This is an increase/decrease of 0.25 basis points compared to the CRP as at xx/xx/2023.
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Information on the country risk premium
What is the country risk premium?
Compared to domestic investments, investments abroad are regularly associated with specific country risks that can influence both the business model of a company – regularly reflected in the beta factor – and the default risk of foreign cash flows. Ideally, these uncertainties are considered directly in the planning assumptions, and the peer group that is used for the cost of capital should be subject to similar country risks. In practice, however, the approach of a country risk premium (CRP) has also become established and is applied in the denominator of the valuation calculation in addition to the cost of capital (but is not part of it). In this context, it is important to avoid double or non-consideration of risks. Country risks generally affect payments to equity and debt holders.
Calculation of the country risk premium
Various approaches to estimating the CRP have become established in practice. The approach pursued by KPMG is based on the difference in yields between government bonds. For this purpose, the yield difference between euro and/or US dollar government bonds of a corresponding country and German or American euro or US dollar benchmark bonds of the same maturity is calculated. The resulting spread is used as a proxy for the geographically induced country default risk. If individual countries have not issued corresponding government bonds, the country risk premium can be derived by considering countries with a similar rating.
What is in the data extract
In the current data extract, we show the development of the average country risk premium for countries with a specific rating. The country risk premium is shown for the main rating class and its notches (+/- one rating level) with the respective average values of the last two years (2-year CRP). The KPMG Valuation Data Source gives you unrestricted access to individual and country-specific risk premiums. The country risk premiums are estimated on the basis of our own analyses and models.
Frequently asked questions
What are country-specific risks?
In general, country risk refers to the risks arising for example from political or regulatory decisions in a country, but also the consequences of government payment difficulties, some of which can have a far-reaching impact on a company's activities in a country. These consequences can, for example, complicate the sale of products and services or they can hinder production.
Are currency risks reflected in the country risk premium?
Currency risks are not reflected in the country risk premium. Depending on the currency underlying a cash flow, currency risks are in practice typically accounted for directly in the cash flow or considered by the inflation delta. The data for the inflation delta can also be found in the KPMG Valuation Data Source.
How is the country risk premium reflected in the cost of capital for valuations?
The country risk premium is not part of the cost of capital; it is a simplified discount in the denominator of a valuation calculation to cover a general country default risk. In the context of specific valuation situations, such as a company valuation, it makes more sense to model or analyze country risks in the planning calculation.
