Recent values of country risk variables for six countries and their relationship to capital adequacy

By: Ronald Calitri



Most of the work for this draft was completed in January, 2001 with data to the end of year 2000 estimated heuristically, especially for the BIS-IMF-OECD-World Bank data and the International Financial Statistics. Five of the six countries were selected by the students in a Fall 2000, International Banking and Finance class at St. John's University. Their unguided choices were mainly on ethnicity, except the Latvian team lacked data and were gracious enough to adopt Russia. I used Brazil as an example in weekly labs and asked the students to try generating the risk indicators on their own from about 3000 series downloaded for them at monthly, quarterly or annual frequency. The data were annualized by averaging to facilitate reading and discussion.

The student teams were obliged to use the Internet extensively for research on the recent past. We discovered together that the most publicly available risk research focused heavily on U.S. dollar Per Capita GDP. Each team contributed uniquely to the eventual findings, adjusting Chinese investment for offshore operations, verifying the stable seasonality of Greek external finances, documenting Russia's interest rate difficulties, confirming the slow monetization of Guatemala and the worsening condition of Ghana's population.

Although this was my first comparative investigation of country risk factors I had previously worked to identify the economic factors underlying the 1997 crisis and studied international cointegration in several centuries of financial data. Yet, it was immensely surprising to confirm the financial difficulties of 1997 having deepened over the years to December 2000. Given the clarity of the reversals of trend displayed below and the economic conditions of the past eighteen months, I do not anticipate further surprises when the data are updated presently.

Few conclusions beyond those induced by observation are drawn below. The improvement of most social risk indicators while finances worsened is the converse of the process found by a Spring 1997 Emerging Markets and their Countries class at NYU in Korea, Taiwan, Sri Lanka, Tanzania, Ivory Coast, Argentina, Morocco, Chile, China and Indonesia. That class used vector auto regressive models on monthly data, and observed downward fluctuations of many macroeconomic series associated with financial market index advances in the period before the 1997 collapse.

Also in Fall 2000, a class in Capital and Money Markets at St. John's investigated about 1800 weekly U.S. series. They analyzed the consolidated balance sheets of money center, regional and foreign commercial banks in connection with U.S. macroeconomic processes. The combined results of the two St. John's projects prompted a short paper at the Spring 2001 Eastern Economic Association Meetings illustrating the downturn and forecasting its continuance. It was titled "Keynes at the MacMillan Committee and the current economic slowdown," and argued the present situation calls for the full panoply of remedies to depression recorded in volume 20 of Keynes' collected works. From this perspective it appears Keynes was forced by the exigencies of domestic politics to settle for the restricted domestic subset of remedies that has become conventional .

draft 8/22/02, data to 1/7/01


The purpose of country risk analysis is to provide factors for quantitative credit risk assessments to lenders and prospective investors in financial markets. Country risk analysis as traditionally practiced covers exchange rate, political and macroeconomic changes, but not such factors as the systematic risks of financial markets and the vagaries of corporate credit conditions except as they impact on economy-wide indicators. Country risk analysis may impact on individual corporate returns when calculated risk factors are added in pricing traditional investment sources. That issue must be set aside here in favor of a larger historical question, whether the denial of investment to countries with high levels of calculated risk has retarded the improvement of the risk indicators themselves. If this is so, it could have perpetuated investment scarcity in spite of persistent need. Responsibility for investment success or defaults on obligations is complicated, so a detailed examination is necessary, carried out on a sample of countries.

Country risk analysis impacts on total capital flows through both institutional and individual investment channels. The country risk analyses prepared by financial institutions weave legal and political attributes of societies around a core of macroeconomic and balance of payments concerns. Though such analyses are multifaceted, technical and partially academic, yet it is still possible that some routinely utilized variables of ancient consensus may have outworn their relevance due to changes in the global financial markets. The central finding here is an indictment of the currently most popular variable in country risk analysis, US dollar per capita GDP growth, on this basis. For non-institutional investors, the marketplace for country risk analysis is predominately filled with financial journalism consisting of cursory mention of minor changes in GDP, exports or other macroeconomic indicators, combined with news from the publicity arena and juicy details of perpetual squabbles among the local elite. Individual investors seeking country risk analysis may be unable to avoid problematic consequences under such circumstances, so increasing the responsibility on institutional practitioners to improve their work.

The subject of quantitative country risk analysis received intense development in the 1970s and 80s following the collapse of the Bretton Woods System and the apparently unprecedented volatility in the global financial markets. In practice, a list of variables was developed during that period (Krayenbuehl, 1983) that appears to have remained in general use. A widely published 1989 seven-country analysis using fourteen variables, (Eng, Lees and Mauer, 2ed. 1998) is represented below for China, Greece, Russia, Ghana, Guatemala and Brazil. It contains elements used in the subsequently developed options pricing approach to country risk assessment (Clark and Marois, 1996), and recent macroeconomic assessments (IMF, 1999; Baig and Goldfajn, 2000). At least 350 monthly, quarterly and annual economic series for each country (Datastream, 10/2000) were converted by averaging to annual frequency and examined by country teams in our International Banking and Finance class at St. Johns University. BIS data, the International Financial Statistics and local financial reports were also consulted and plentiful Datastream misposts of the IFS corrected. The additional use of non-traditional data from F.A.O. in country risk analysis is suggested. Country risk variables and inward investment flows are compared in this study over fourteen years, 1987-2000.

International financing of the Countries

The populations of the sample countries are displayed on log scale in figure 1. Figure 2 shows the per capita GDPs in US dollars.


In financial terms, although our sample contains 27.3% of world population, only Brazil, China and Greece have Datastream US dollar stock market indices. The total of the stock index dollar values, displayed logarithmically (figure 3) and in levels (figure 4) was $325 billion on 12/1/2000, or 1.7% of the Datasteam world index’s market value - $20.0 trillion.

3. 4.

Inward investment flows were available from three major sources: direct investment (IMF, 2000), consolidated international claims of BIS reporting banks (BIS, 2000) and external debt (BIS-IMF-OECD-World Bank, 2000). Only the larger levels of direct investment to China and Brazil are quite visible in figure 5, with levels in million US dollars, as is Russia’s brief attractiveness 1996-98.


Figure 6’s log scale displays continuity for investment in Greece and a fall-off for Ghana after 1994. For the other countries a succession of rapid capital inflows occurred over the early to mid-90s, followed by decline of commitments after 1998.

The data on the international claims of BIS banks on our countries are displayed in figures 7 and 8.


Levels figure 7 includes Hong Kong to indicate the relative scale of our countries’ economies. The magnitude of bank claims is equal to or greater than direct investment. In the second graph on log scale, the steady growth over the early period peaks in 1997 for China, Brazil and Russia, and in 1999 for Ghana. Claims on Greece increased to nearly equal China’s and at present growth rates will equal Brazil’s in 2002.

The BIS-IMF-OECD-World Bank data on international indebtedness (without international reserves) are available for five of our countries and displayed in figures 9 and 10. The figures are presently accurate after 1994.

9. 10.

The net creditor positions in figure 9 before 1995 are due to missing bank loans data in the source. Only for China and Guatemala would including international reserves in the debt accounting reverse the debit positions. Figure 10 displays normalized net indebtedness. It strongly suggests that when the data are complete our countries’ external financing will be seen to follow an integrated pattern over the entire span of our study.

The integration of investment is further illustrated using normalized details in figures 11 and 12.


Figure 11 is the pattern of BIS bank claims (as opposed to non-bank and public authority) on our sample. Figure 12 displays the foreign direct investment, international claims and net indebtedness of our three largest countries, Brazil, China and Russia. In both figures, accelerating investment is illustrated for the period 1992-97 and declines of activity after.

The BIS-IMF-OECD-World Bank web-numbers require additions from previous sources to complete the total debt data for the full period.


The Country Risk Variables

It has been possible to construct most of all but two of the Eng, Lees and Mauer variables at this point, with some observations missing. Data is available from the UN for Variables 5 and 6. I have substituted nutritional indices of social stability.

  1. Liquidity

The proportions of reserves to the current account deficit and to import aggregates are short-term indicators of the potential to cover routine demand for international means of payment without recourse to further financing. Reserves are displayed on log scale in figure 13. Mobilizations of reserves to cover speculative attacks on exchange rates are frequently noted. Current account balances are normalized in figure 14.


The opposite trends in figures 13 and 14 reflect increases of both reserves and current account imbalances.

1.Reserves as % of current account deficit


Episodic peaks dominate the levels of the reserve to current account balance ratio (figure 15). Unusually low deficits for Brazil and Greece, and low surplus for China matched moderate reserve accumulations in 1993, 1994 and 1995 by Brazil, Greece and China. Greek reserves were 59.4 times the current account deficit in 1994, but declined to 3.4 in 1995, for example. Greece and Guatemala had the lowest means (-192% and –168%) and the only standard deviations smaller than the mean. Normalized figure 16 illustrates that while all countries experienced considerable fluctuations, after 1995 only Russia’s were substantial.

2 Reserves (Months) of import cover


Figure 17 illustrates the poor and worsening position of Ghana after 1996. All the other countries had more than four months’ reserves in 2000. Normalized figure 18 demonstrates the relative improvements from 1993-98, continuing for Guatemala and Russia, but worsening for all other countries over the past two years.

II. Economic and Social Stability

3. Growth in U.S. dollar GDP per capita


US dollar per-capita GDP (IMF) was used to construct this index. None of our countries escaped year-on-year declines over the post-1995 period. The popularity of this index belies its complexity. It is the product not only of nominal GDP and the level of prices, that is the real GDP discussed next, but also of the exchange rate and size of the population. For example, dollar GDP per capita in Brazil fell 29.0% in 1999 due to devaluation, but increased by 18.8% in 2000. In Russia, a slowly declining population moderately abated the 33.3% fall in 1999 and intensified the 24.1% increase in 2000.

4. Real GDP Growth


The levels of this index (figure 21) reflect negatively the influence of high inflation in Brazil in the early 1990s and positively the reduction of prices in China from 1995-99. Despite the connection between US dollar per capita GDP growth and real GDP growth, the former remains more popular. Normalized figure 22 illustrates some improvements of real GDP after 1994. The median levels were higher in the later period, for all countries except Ghana, as illustrated in the following table.

Median Real GDP Growth in Six Countries, 1987-2000





















5. Energy Consumption per capita

This variable requires research. Energy production is available for some countries from Datastream. This doesn't equal consumption due to cross-border sales, so another source will be necessary.

5a. Nutritional Energy Consumption

It seems reasonable to consider public nutrition as an indicator of economic and social stability. Three nutritional indices were constructed from FAO Food Balance Sheet average availability. The first is energy deficit, the percentage deficit of per capita calorie consumption from the developed world average.


Figure 23 illustrates slowly diminishing but persistent differences of calorie consumption between developed and developing countries. The deficit has halved for Ghana, China and Brazil but still remains significant. The deficit worsened in Guatemala; and Russia moved to a calorie deficit for the first time in 1991 that worsened thereafter. Both are visible in normalized figure 24. Only for Greece did relative calorie consumption remain strongly positive.

The deficit in the percentage protein consumed to the developed country average is about 50% larger than the calorie deficit, but follows a near-identical pattern in figures 25 and 26.

25. 26.

The final internationally available nutritional indicator is fat consumption. In figures 27 (levels) and 28 (normalized), with the developed countries’ average for comparison, fat is graphed as a percentage of dietary energy. The WHO recommended consumption for fat in the diet ranges from 10 to 30 percent of dietary energy.


Greece was above 35% energy from fat, and the developed countries near constant around 31%. The growing Greek fat surplus is a conditional negative depending on the proportions of lipid types. In contrast, Ghana’s fat consumption has declined to almost the WHO lower limit. This is an extremely dire public health indicator for perhaps 1/3 the Ghanaian population, given the distribution of income. On balance, the decline for Russia is also a negative. The rapid increases of fat to energy for four of six countries are probably as good indicators of increasing consumerisation as proportional M2, even if they also forecast increased demand for health services. The opposite forecast ensues from the slow decline of fat in diet in developed countries overall visible in figure 28 in track with the declines in Ghana and Russia. The improvements of dietary energy and protein may reliably forecast productivity improvements.

6. Percent Attending Secondary School

Requires sourcing for more current enrollments.

III. Financial Stability

7. Consumer Prices


The early 1990s hyperinflations of Brazil and Russia dominate the levels of figure 29. Normalized figure 30 emphasizes a convergence to price moderation after 1995, a risk-reducing sign, except for China. Restraints on profitability growth in low-inflation environments need to be countered by productivity improvements that are often brought about by international direct investment.

8. Monetary Holdings as Percent of GDP

Except for Ghana, where domestic credit proxied, M2, currency plus demand deposits, was used to measure monetary holdings.


Figure 31’s levels data highlight Greece’s developed country status and full monetization. Guatemala and China are the least monetized. Except for Guatemala, where stability after 1997 suggests little change, normalized figure 32 is suggestive of continuously increasing consumerisation in our countries over the past six years. This seems to us a strongly positive indicator of social stability.

IV. Balance of Payments

9. Export Growth Rate

33. 34.

Levels figure 33 and normalized figure 34 indicate declining export growth over the period 1994-99. The year 2000 recoveries by Brazil, China and Russia are probative for our case since investment failed to respond to this change. It will be necessary to check what products these were.

The export growth rate is generally focused upon as the generator of foreign exchange resources; and because it is believed that imports occur as the result of having foreign exchange to dispose of. Figures 35 and 36 display the imports and exports of our countries, divided into two groups by market size.

35. 36

In the small countries, imports lead exports in granger causality. In Brazil and Russia, exports lead. In China both are important. In all cases exports and imports have trended together.

10. Change in Terms of Trade


Import and export price indices are needed for China and Ghana. Since each of our countries has multiple trading partners, the convergence of this indicator in figure 37 to nearly the zero level in 1999-2000 suggests general price stability in most countries. It is also suggestive that Greece’s terms have improved recently, of either persistent technical superiority in their products, or possible differences between developed and less developed countries.

11. Net Direct Investment as percent of Current Account Deficit


Median foreign direct investment as a proportion of current account balance was lowest for Ghana, Guatemala and Russia. But only for Guatemala was the standard deviation lower than the mean.

V. Financial Incentives

12. Real Interest Rate Level

Of the many types of interest rates, only lending rates were available from a uniform source for all sample countries. Real lending rates were calculated by subtracting changes in consumer prices. Comparisons of these rates include both the within-country spreads between deposit and lending rates and the international deposit rate differences that indicate capital attractiveness. Normalized figure 41's sharp increases and decreases evidence the need for a higher-frequency calculation of this factor.


Figure 42 examines real lending rate levels for the past six years only. Over that time the ratio of the standard deviation of the real lending rate to its mean was 20% for Greece, followed by Brazil 37%, China 49%, Russia 141%, Ghana 1,002% and Guatemala 3,512%. This is an important indicator, especially for investors who might wish for the opportunity to practice portfolio strategy with their in-country asset positions. The completed version of this section will have for five of the six countries, equity return (deflated by exchange and prices), as well as the deposit rates needed for a somewhat stable risk-free parking point from year-to-year.

VI. Debt Burden and Debt Service

13. External Debt as % GDP

Figures 43 and 44 illustrate international BIS claims rather than total debt, for perspective across the entire period.


The elevated position of Greece and the rising trend of the ratio of international claims to GDP make this variable appear closely related to the M2-GDP ratio. As an indicator of international commitments the increases should perhaps not be seen as entirely negative. The bank, non-bank and public portions are of interest for further analysis.

The BIS-IMF-OECD-World Bank figures for 1995-2000 allow display of total debt to GDP for five countries.


This indicator separates Ghana from the other countries. For the rest, debt to GDP either remained stable for the entire period or increased steadily to a peak in 1998-9 followed by improvements.

14. Debt Service Ratio [months import cover]

I have not yet located a good source for combined interest and principal payments. The proxy suggested by Clark and Marois is to use final debt maturing under one year in place of the following year’s principal and interest. We use BIS international claims and display the ratio of prior one year debt to imports in figures 47 and 48.


This comparison, although approximate, indicates that recently for Greece and Brazil about 40% of imports are balanced by debt service. In all countries after 1998 there is either improvement or lack of cause for concern that our countries are over-extended. The declines of the ratio appear to reflect moderately expanding imports combined with worsening financial availability.


The Comparison

This section should be about two pages, expanded by our analysis on the basis of suggestions. Generally, I think just a few points but good ones. The paper will be appreciated most in any case for the data.

Several of the indicators, especially the monetary ones seem to have improved uniformly, while international investment in our countries appears to have lagged. That, to me is the central result of the comparison and the paper. The major reason I see for this is that many investors (and papers) have focused on dollar GDP growth in single countries and concluded against making investments, or, they have focused on the volatility of real GDP without noting whether it is permanent. Also, some analysts may have misinterpreted the Debt to GDP ratio. The decline in US$GDP per capita hides the overall decline of debt that simply lagged the GDP decline. Similar issues are involved with other variables, enough to suggest that country risk analysts have not focused on the broader list of indices and have not made required international comparisons to determine the uniqueness of risk factors.

Given our work, we have the responsibility now of looking at the results and suggesting what risk indicators investors and country risk analysts should use. We also need to look again, given this evidence, at the web-analyses of country risk.

There is also a current, strong on the side of professional economists, and even stronger on that of Finance but unspoken, arguing that efficiency criteria should guarantee that appropriate amounts of investment are delivered for remunerative projects. Our efforts with country risk variables have bypassed then, what is almost a duty in studies like this, to mention whether the classic efficiency relationships, purchasing power parity, the international Fischer effect, interest rate parity, hold for our countries, and what models of exchange rate determination seem appropriate. All these subjects are optional though.

Along the same lines, a good possibility to close up this section would be to take the option pricing approach of Clark and Marois (1996). The technique sets an asset value to a country based on GDP returns to fixed capital formation and is sensitive to the risk-free rate chosen and to the duration of the outstanding debt. This method would provide closure, but might be somewhat narrow given the variety of risk factors we are discussing. I will work it into the next draft of the paper. So let me know your reactions to this draft as it stands.


Here we will encapsulate the findings and draw implications. The one possibility I suggest is to put forward a possible explanation of the recent change that could lead people to reconsider their commitments. The relationship it is suggested be explored after 1997 is between increased borrowing by developed countries (Bank of England, 2000), and the poor recent investment record of our countries.

I will hold back on other ideas pending further analysis and comments.



International Financial Statistics to Nov.2000

BIS-IMF-OECD-World Bank.

BIS International Banking Statistics same url.

Clark, Ephraim and Bernard Marois, Managing Risk in International Business, Techniques and applications, International Thomson Business Press, London, 1996.

Eng, Maximo V., Francis A. Lees, Laurence J. Mauer, Global Finance, Addison-Wesley, Reading, Ma., 2nd. Ed., 1998.