One of the first questions that I usually receive during a training course on Country Risk Analysis concerns the selection of risk indicators. The “Study On Short-Term Economic Indicators For The Arab Region” by the Economic And Social Commission For Western Asia (ESCWA) gives various good pointers on what risk indicators to select for a thorough analysis of a particular country.
The report suggests a rather detailed template for the selection of short-term economic data (pp. 87-88):
- National accounts
- Production and turnover
- Price indicators
- Labour market indicators
- External sector indicators
- Financial sector indicators
- General government sector indicators
- Household sector indicators
- Non-financial corporations sector indicators
- Financial market indicators
- Real estate market indicators
Pages 24-39 offer a valuable introduction to the key risk indicators in each category. For example, the importance of inflation is described as follows (p. 16):
The consumer price index (CPI) focuses on household consumption of goods and services. […] The CPI is an important economic indicator of price change. The index is used in many ways by Government, businesses and society in general. The index can affect interest rates, tax allowances, wages, State benefits, pensions, maintenance, contracts and many other payments. It also shows the impact of inflation on family budgets. The index is also used as one of the key variables for monetary policy in defining price stability and targeting an inflation rate.
Particularly the section on external sector indicators (pp. 18-19) is very informative in terms of selected indicators, their definitions and their relevance. Take for example the way in which the report explains the difference between the balance and payments and the international investment position (IIP):
The monitoring of the transactions and positions held by a country in relation to the rest of the world is guided by international accounts represented by the balance [of] payments and the international investment position (IIP). The balance of payments is a statistical statement that summarizes transactions between residents and non-residents during a given period. It consists of the goods and services account, the primary income account, the secondary income account, the capital account, and the financial account. The IIP is a statement that shows, at a certain point in time, the value of financial assets of residents of an economy and the liabilities of residents of an economy to non-residents.
For the beginning or aspiring country risk analyst, an enlightening observation in the report is that country risk analysis requires both a short-term and long-term assessment. The report clearly explains why short-term risk indicators matter in a sound economic analysis (p. vii):
Short-term economic indicators comprise a range of statistical series that are generally compiled and disseminated on a daily, weekly, monthly or quarterly basis. They shed light on recent developments in key aspects of national economies and contribute to formulating and monitoring economic and monetary policy. They also facilitate analysis of economic performance and provide a basis for the preparation of future performance forecasts. A more specific application of economic indicators is the study of business cycles.
The report also stresses the importance of studying the dynamics between
- short-term and long-term trends
- domestic and international trends
- political and economic trends
and how these dynamics affect policy-making options in the countries concerned (p. 2):
Short-term macroeconomic fluctuations are known to have long-term economic consequences. In the Arab region, short-term policy issues have become of critical importance to policymakers in their quest to guide the short-term direction of economies for two reasons: first, a rapidly expanding financial sector resulting from globalisation; second, heightened socio-economic tension, regional insecurity and strained public finances in Arab countries in transition since 2011.
The eventual decision on including risk indicators in an analysis of a country should depend on -among other factors- the risk type (e.g. transfer risk or sovereign risk), the risk horizon (e.g. one-month or ten years) and the rationale behind the analysis (e.g. building a new plant or buying bonds).
Many thanks to my former Country Risk Analysis Summer School student David for suggesting the ESCWA report for the “Getting Started with Country Risk Analysis” series.
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