Wednesday, November 5, 2008

Surprising Country Risk Ratings

Merrill Lynch analysts have decided to go back to country risk analysis the old-fashioned way, by looking at indicators of macroeconomic and financial stability (see this article). Specifically, the look at indicators such as: the current account financing gap, FX reserves/short-term external debt ratio, exports to-GDP ratio, private credit-to-GDP ratio, private credit growth, loans-to deposits ratio and banks capital-to-assets ratio.

Using these indicators they obtain the following country risk rankings which are a bit surprising.

Now I am not yet ready to move my assets to Nigeria. It is important to note that a country might do well on some of these rankings by having a horribly underdeveloped financial system. This would certainly lower private credit growth for example. And primary exporters will do well since they have high foreign exchange earnings. Still the rankings are interesting. They indicate that those countries that were the go-go countries in the boom are much more risky now.

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