Country Risk Modeling in Indonesia: An Empirical Approach

This study is intended to analyze the influence of internal and external risk factors consideredThis study is intended to analyze the influence of internal and external risk factors consideredrelevant influencing the country risk. We find result of long term VECM estimationindicating that the exchange rate, the interest rate of certificate of Bank Indonesia (SBI) for 6months and the world economic growth have positive and significant influence to countryrisk. Inflation, Indonesia economic growth, the Fed, and MSCI ACWI IMI return havenegative and significant influence to country risk. All hypotheses presented in this study aretheoretically and statistically accepted, except that the hypothesis on inflation is rejectedbecause it is in controversy with theory, although statistically it has significant influence tothe country risk in Indonesia.Meanwhile the estimated output of VECM in a short term, the exchange rate, the interest rateof SBI for 6 months and the world economic growth have positive and significant influenceto country risk. The Fed and MSCI ACWI IMI return have negative and significant influenceto country risk. The hypotheses testing accepted from the estimated VECM in short term arethe exchange rate, the SBI interest rate in 6 months, the Fed, the world economic growth andthe return of MSCI ACWI IMI.

Keywords: Country Risk, Country Beta Approach, Risk Factors, Indonesia, VECM