Country Risk Premium

The Country Risk Premium (CRP) is the additional return required by investors to invest in a country with higher political, economic or institutional risk than a reference market — typically the United States or Germany. It is integrated into the cost of equity via the CAPM for companies operating in emerging or higher-risk markets. It is commonly estimated from sovereign default spreads or from the datasets published by Damodaran, then adjusted for the company’s actual exposure: an exporter invoicing in hard currencies bears less country risk than its domicile suggests. For multi-country groups, the premium is weighted by the geographic split of cash flows, and consistency with the cash flow scenarios is essential to avoid double counting risk. Its magnitude can materially move the discount rate in emerging-market valuations.

CRP is estimated by several methods: the Damodaran approach (sovereign default spread × relative equity/bond market volatility), sovereign CDS spreads (5-year Credit Default Swaps), or yield spreads relative to German or US government bonds. For France and Switzerland, the country risk premium is generally considered zero or negligible (developed markets, AAA rating) — CRP applies principally to transactions involving companies exposed to emerging markets (North Africa, Eastern Europe, Latin America).

In valuations of Franco-Swiss SMEs with material subsidiaries or clients in high-risk countries, CRP is integrated into the WACC either by adjusting the beta to reflect country risk, or by adding CRP directly to the discount rate, weighted by the revenue share exposed to the at-risk market.

Example: a Swiss SME generates 40% of revenues in Turkey and 30% in Egypt. CRP Turkey (Damodaran 2025): 4.2%. CRP Egypt: 6.8%. Base WACC (Swiss market): 9.5%. Adjusted WACC: 9.5% + (40% × 4.2%) + (30% × 6.8%) = 13.22%. The 3.7 percentage point adjustment reduces DCF terminal value by 37% vs the unadjusted WACC.

At Hectelion, we integrate country risk premiums in our valuations of Franco-Swiss SMEs exposed to emerging markets, drawing on updated Damodaran data and market spreads.