Sovereign Risk in Project Finance

Sovereign risk in project finance refers to the potential financial loss investors might face due to a government's actions or instability. This could include political changes, economic downturns, or policy shifts that affect a project's profitability or ability to operate. For instance, if a country suddenly decides to change laws affecting foreign investments or defaults on its debts, investors could lose money. Understanding sovereign risk is crucial for assessing the stability and reliability of the environment in which a project is being developed, particularly in emerging markets.