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Country Risk Premium (CRP)

Step-by-Step Guide to Understanding the Country Risk Premium (CRP)

Last Updated February 20, 2024

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Country Risk Premium (CRP)

How to Calculate Country Risk Premium

The country risk premium (CRP) is an adjustment factor applied to calculate the cost of equity (ke), which represents the minimum required rate of return by shareholders, i.e. “hurdle rate”.

In practice, the most common method to determine the cost of equity is the capital asset pricing model (CAPM), which is based on the premise that investors must be compensated with a higher return to undertake an investment of higher risk (and vice versa).

The country risk premium is meant to serve as additional compensation for the risks related to political instability, geopolitical risk, exchange rate volatility (FX), and economic fluctuations specific to a given country.

The inclusion of the country risk premium (CRP) is intended to adjust the cost of equity for the potentially adverse effects that stem from a particular country’s geopolitical environment and economic conditions.

The macroeconomic risks must be considered to analyze the risk of investing in securities where the underlying issuer’s financial and operating performance can be impacted by the risks outlined earlier, especially for multinational companies that operate in several countries.

The factors that determine the country risk premium include the given country’s political governance system, risk of corruption, legal system, and geopolitical risk, such as the potential for war.

The more significant each risk component is for a particular country, the higher the country risk premium, which subsequently increases the cost of equity (ke).

Hence, a country with substantial geopolitical and currency risk such as Argentina has a much higher country risk premium (18.2%) compared to a developed country like the U.S. (0.0%).

Country Risk Premium Determinants

Determinants of Country Risk Premium (Source: Damodaran)

Damodaran Country Risk Premium Data (July 2023 Update)

The following data set, compiled by NYU professor Aswath Damodaran, contains the estimated country risk premiums (CRP) by country, as of July 2023.

Country Moody’s Credit Rating Default Spread Country Risk Premium (CRP) Equity Risk Premium (ERP) Corporate Tax Rate (%)
Abu Dhabi Aa2 0.53% 0.75% 5.75% 15.00%
Albania B1 4.82% 6.83% 11.83% 15.00%
Algeria NR 3.85% 5.46% 10.46% 26.00%
Andorra (Principality of) Baa2 2.04% 2.89% 7.89% 18.98%
Angola B3 6.95% 9.86% 14.86% 25.00%
Argentina Ca 12.84% 18.21% 23.21% 35.00%
Armenia Ba3 3.85% 5.46% 10.46% 18.00%
Aruba Baa2 2.04% 2.89% 7.89% 25.00%
Australia Aaa 0.00% 0.00% 5.00% 30.00%
Austria Aa1 0.43% 0.61% 5.61% 24.00%
Azerbaijan Ba1 2.68% 3.80% 8.80% 20.00%
Bahamas B1 4.82% 6.83% 11.83% 0.00%
Bahrain B2 5.88% 8.35% 13.35% 0.00%
Bangladesh B1 4.82% 6.83% 11.83% 32.50%
Barbados Caa1 8.02% 11.38% 16.38% 5.50%
Belarus C 17.50% 24.82% 29.82% 18.00%
Belgium Aa3 0.64% 0.91% 5.91% 25.00%
Belize Caa2 9.63% 13.66% 18.66% 27.18%
Benin B1 4.82% 6.83% 11.83% 30.00%
Bermuda A2 0.91% 1.28% 6.28% 0.00%
Bolivia Caa1 8.02% 11.38% 16.38% 25.00%
Bosnia and Herzegovina B3 6.95% 9.86% 14.86% 10.00%
Botswana A3 1.28% 1.82% 6.82% 22.00%
Brazil Ba2 3.22% 4.57% 9.57% 34.00%
Brunei NR 0.64% 0.91% 5.91% 18.50%
Bulgaria Baa1 1.71% 2.43% 7.43% 10.00%
Burkina Faso Caa1 8.02% 11.38% 16.38% 28.00%
Cambodia B2 5.88% 8.35% 13.35% 20.00%
Cameroon B2 5.88% 8.35% 13.35% 33.00%
Canada Aaa 0.00% 0.00% 5.00% 25.00%
Cape Verde B3 6.95% 9.86% 14.86% 0.00%
Cayman Islands Aa3 0.64% 0.91% 5.91% 0.00%
Chile A2 0.91% 1.28% 6.28% 27.00%
China A1 0.75% 1.07% 6.07% 25.00%
Colombia Baa2 2.04% 2.89% 7.89% 35.00%
Congo (Democratic Republic of) B3 6.95% 9.86% 14.86% 30.00%
Congo (Republic of) Caa2 9.63% 13.66% 18.66% 28.00%
Cook Islands B2 5.88% 8.35% 13.35% 28.43%
Costa Rica B2 5.88% 8.35% 13.35% 30.00%
Côte d’Ivoire Ba3 3.85% 5.46% 10.46% 25.00%
Croatia Baa2 2.04% 2.89% 7.89% 18.00%
Cuba Ca 12.84% 18.21% 23.21% 27.18%
Curacao Baa2 2.04% 2.89% 7.89% 22.00%
Cyprus Ba1 2.68% 3.80% 8.80% 12.50%
Czech Republic Aa3 0.64% 0.91% 5.91% 19.00%
Denmark Aaa 0.00% 0.00% 5.00% 22.00%
Dominican Republic Ba3 3.85% 5.46% 10.46% 27.00%
Ecuador Caa3 10.70% 15.18% 20.18% 25.00%
Egypt B3 6.95% 9.86% 14.86% 22.50%
El Salvador Caa3 10.70% 15.18% 20.18% 30.00%
Estonia A1 0.75% 1.07% 6.07% 20.00%
Ethiopia Caa2 9.63% 13.66% 18.66% 30.00%
Fiji B1 4.82% 6.83% 11.83% 20.00%
Finland Aa1 0.43% 0.61% 5.61% 20.00%
France Aa2 0.53% 0.75% 5.75% 25.00%
Gabon Caa1 8.02% 11.38% 16.38% 30.00%
Gambia NR 5.88% 8.35% 13.35% 31.00%
Georgia Ba2 3.22% 4.57% 9.57% 15.00%
Germany Aaa 0.00% 0.00% 5.00% 30.00%
Ghana Ca 12.84% 18.21% 23.21% 25.00%
Greece Ba3 3.85% 5.46% 10.46% 22.00%
Guatemala Ba1 2.68% 3.80% 8.80% 25.00%
Guernsey (States of) Aa2 0.53% 0.75% 5.75% 0.00%
Guinea NR 9.63% 13.66% 18.66% 29.15%
Guinea-Bissau NR 5.88% 8.35% 13.35% 29.15%
Guyana NR 1.71% 2.43% 7.43% 18.64%
Haiti NR 12.84% 18.21% 23.21% 18.64%
Honduras B1 4.82% 6.83% 11.83% 25.00%
Hong Kong Aa3 0.64% 0.91% 5.91% 16.50%
Hungary Baa2 2.04% 2.89% 7.89% 9.00%
Iceland A2 0.91% 1.28% 6.28% 20.00%
India Baa3 2.35% 3.33% 8.33% 30.00%
Indonesia Baa2 2.04% 2.89% 7.89% 22.00%
Iran NR 6.95% 9.86% 14.86% 20.23%
Iraq Caa1 8.02% 11.38% 16.38% 15.00%
Ireland Aa3 0.64% 0.91% 5.91% 12.50%
Isle of Man Aa3 0.64% 0.91% 5.91% 0.00%
Israel A1 0.75% 1.07% 6.07% 23.00%
Italy Baa3 2.35% 3.33% 8.33% 24.00%
Jamaica B2 5.88% 8.35% 13.35% 25.00%
Japan A1 0.75% 1.07% 6.07% 23.20%
Jersey (States of) Aa3 0.64% 0.91% 5.91% 0.00%
Jordan B1 4.82% 6.83% 11.83% 20.00%
Kazakhstan Baa2 2.04% 2.89% 7.89% 20.00%
Kenya B3 6.95% 9.86% 14.86% 30.00%
Korea Aa2 0.53% 0.75% 5.75% 25.00%
Korea, D.P.R. NR 12.84% 18.21% 23.21% 23.10%
Kuwait A1 0.75% 1.07% 6.07% 15.00%
Kyrgyzstan B3 6.95% 9.86% 14.86% 10.00%
Laos Caa3 10.70% 15.18% 20.18% 22.81%
Latvia A3 1.28% 1.82% 6.82% 20.00%
Lebanon C 17.50% 24.82% 29.82% 17.00%
Liberia NR 10.70% 15.18% 20.18% 29.15%
Libya NR 2.04% 2.89% 7.89% 20.00%
Liechtenstein Aaa 0.00% 0.00% 5.00% 12.50%
Lithuania A2 0.91% 1.28% 6.28% 15.00%
Luxembourg Aaa 0.00% 0.00% 5.00% 24.94%
Macao Aa3 0.64% 0.91% 5.91% 22.81%
Macedonia Ba3 3.85% 5.46% 10.46% 10.00%
Madagascar NR 6.95% 9.86% 14.86% 20.00%
Malawi NR 12.84% 18.21% 23.21% 30.00%
Malaysia A3 1.28% 1.82% 6.82% 24.00%
Maldives Caa1 8.02% 11.38% 16.38% 22.81%
Mali Caa2 9.63% 13.66% 18.66% 22.81%
Malta A2 0.91% 1.28% 6.28% 35.00%
Mauritius Baa3 2.35% 3.33% 8.33% 15.00%
Mexico Baa2 2.04% 2.89% 7.89% 30.00%
Moldova B3 6.95% 9.86% 14.86% 12.00%
Mongolia B3 6.95% 9.86% 14.86% 25.00%
Montenegro B1 4.82% 6.83% 11.83% 15.00%
Montserrat Baa3 2.35% 3.33% 8.33% 27.18%
Morocco Ba1 2.68% 3.80% 8.80% 31.00%
Mozambique Caa2 9.63% 13.66% 18.66% 32.00%
Myanmar NR 10.70% 15.18% 20.18% 25.00%
Namibia B1 4.82% 6.83% 11.83% 32.00%
Netherlands Aaa 0.00% 0.00% 5.00% 25.80%
New Zealand Aaa 0.00% 0.00% 5.00% 28.00%
Nicaragua B3 6.95% 9.86% 14.86% 30.00%
Niger B3 6.95% 9.86% 14.86% 22.81%
Nigeria Caa1 8.02% 11.38% 16.38% 30.00%
Norway Aaa 0.00% 0.00% 5.00% 22.00%
Oman Ba2 3.22% 4.57% 9.57% 15.00%
Pakistan Caa3 10.70% 15.18% 20.18% 29.00%
Panama Baa2 2.04% 2.89% 7.89% 25.00%
Papua New Guinea B2 5.88% 8.35% 13.35% 30.00%
Paraguay Ba1 2.68% 3.80% 8.80% 10.00%
Peru Baa1 1.71% 2.43% 7.43% 29.50%
Philippines Baa2 2.04% 2.89% 7.89% 25.00%
Poland A2 0.91% 1.28% 6.28% 19.00%
Portugal Baa2 2.04% 2.89% 7.89% 21.00%
Qatar Aa3 0.64% 0.91% 5.91% 10.00%
Ras Al Khaimah (Emirate of) A3 1.28% 1.82% 6.82% 0.00%
Romania Baa3 2.35% 3.33% 8.33% 16.00%
Russia Ca 12.84% 18.21% 23.21% 20.00%
Rwanda B2 5.88% 8.35% 13.35% 30.00%
Saudi Arabia A1 0.75% 1.07% 6.07% 20.00%
Senegal Ba3 3.85% 5.46% 10.46% 30.00%
Serbia Ba2 3.22% 4.57% 9.57% 15.00%
Sharjah Ba1 2.68% 3.80% 8.80% 0.00%
Sierra Leone NR 12.84% 18.21% 23.21% 30.00%
Singapore Aaa 0.00% 0.00% 5.00% 17.00%
Slovakia A2 0.91% 1.28% 6.28% 21.00%
Slovenia A3 1.28% 1.82% 6.82% 19.00%
Solomon Islands Caa1 8.02% 11.38% 16.38% 30.00%
Somalia NR 12.84% 18.21% 23.21% 29.15%
South Africa Ba2 3.22% 4.57% 9.57% 27.00%
Spain Baa1 1.71% 2.43% 7.43% 25.00%
Sri Lanka Ca 12.84% 18.21% 23.21% 24.00%
St. Maarten Ba2 3.22% 4.57% 9.57% 27.18%
St. Vincent & the Grenadines B3 6.95% 9.86% 14.86% 27.18%
Sudan NR 17.50% 24.82% 29.82% 35.00%
Suriname Caa3 10.70% 15.18% 20.18% 36.00%
Swaziland B3 6.95% 9.86% 14.86% 27.50%
Sweden Aaa 0.00% 0.00% 5.00% 20.60%
Switzerland Aaa 0.00% 0.00% 5.00% 18.00%
Syria NR 17.50% 24.82% 29.82% 28.00%
Taiwan Aa3 0.64% 0.91% 5.91% 20.00%
Tajikistan B3 6.95% 9.86% 14.86% 18.00%
Tanzania B2 5.88% 8.35% 13.35% 30.00%
Thailand Baa1 1.71% 2.43% 7.43% 20.00%
Togo B3 6.95% 9.86% 14.86% 22.81%
Trinidad and Tobago Ba2 3.22% 4.57% 9.57% 30.00%
Tunisia Caa2 9.63% 13.66% 18.66% 15.00%
Turkey B3 6.95% 9.86% 14.86% 23.00%
Turks and Caicos Islands Baa1 1.71% 2.43% 7.43% 0.00%
Uganda B2 5.88% 8.35% 13.35% 30.00%
Ukraine Ca 12.84% 18.21% 23.21% 18.00%
United Arab Emirates Aa2 0.53% 0.75% 5.75% 0.00%
United Kingdom (U.K.) Aa3 0.64% 0.91% 5.91% 25.00%
United States (U.S.) Aaa 0.00% 0.00% 5.00% 25.00%
Uruguay Baa2 2.04% 2.89% 7.89% 25.00%
Uzbekistan Ba3 3.85% 5.46% 10.46% 15.00%
Venezuela C 17.50% 24.82% 29.82% 34.00%
Vietnam Ba2 3.22% 4.57% 9.57% 20.00%
Yemen, Republic NR 10.70% 15.18% 20.18% 20.00%
Zambia Ca 12.84% 18.21% 23.21% 35.00%
Zimbabwe NR 8.02% 11.38% 16.38% 25.00%

Source: Damodaran

Country Risk Premium Formula

The formula to calculate the cost of equity with the country risk premium included is as follows.

In practice, additional premiums are added to the ERP when analyzing small companies and companies operating in higher-risk countries:

Cost of Equity (ke) = Risk-Free Rate (rf) + Beta (β) × Equity Risk Premium (ERP) + Country Risk Premium (CRP)

Where:

  • Risk-Free Rate (rf) → The yield on debt issuances by the government – for example, the yield on the 10-year U.S. Treasury Note is the standard risk-free rate for companies operating in the U.S.
  • Beta (β) → The beta is the risk measure in the CAPM formula that strives to capture the systematic risk of a given security – which refers to the portion of risk that is non-diversifiable in a portfolio.
  • Equity Risk Premium (ERP) → The equity risk premium, or “market risk premium”, reflects the risk of investing in public equities, rather than risk-free securities, i.e. the difference between the expected market return (rm) and the risk-free rate (rf)

Country Risk Premium Calculator

We’ll now move to a modeling exercise, which you can access by filling out the form below.

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Country Risk Premium Calculation Example

Suppose we’re tasked with calculating the cost of equity (ke) of a publicly-traded multinational company, where a sizable percentage of revenue comes from China.

The yield on 10-year bond issuances by the U.S. government is 2.74% as of the present date, while the beta of the company is 1.12.

The equity risk premium (ERP) and country risk premium (CRP) of China, per the data set compiled by Damodaran, is 6.07% and 1.07%, respectively.

The inputs to calculate the cost of equity (ke) under the capital asset pricing model (CAPM) are as follows.

  • Risk-Free Rate (rf) = 2.74%
  • Beta (β) = 1.12
  • Equity Risk Premium (ERP) = 6.07%
  • Country Risk Premium (CRP) = 1.07%

After entering our assumptions into the formula, we arrive at a cost of equity of 10.6% for our hypothetical company with operations in China (and substantial exposure to country risk, like political instability, foreign tension, and cross-border regulatory changes).

  • Cost of Equity (ke) = 2.74% + 1.12 (6.07%) + 1.07% = 10.60%

By incorporating the country risk premium, practitioners and investors in foreign markets can better analyze the risk-adjusted returns on potential investments.

Country Risk Premium Calculator

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