Wednesday, November 5, 2008

Risky territory

(FT Alphaville) Merrill Lynch’s much-anticipated global economics missive is out today.

The 21-page note, prepared, according to ML, by popular client request, is titled “Everything you’ve ever wanted to know about the world*” with the footnote “*And were not afraid to ask.”

The ML economists are arguing for a return to old-school style country risk analysis. They’re looking at 62 indicators for the 60 world economies they cover, plus regional aggregates (5,000 bits of data in all, the busy ML team tells us).

They’ve constructed a risk ranking for major world economies and regions based on seven of those indicators: 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.

And the results are the following:

ML - Country risk rating

In terms of regions, the most vulnerable are EMEA, Americas and Emerging EMEA, according to ML — all with over-leveraged financial systems and stretched external debt ratios. BRIC, Latin America and Emerging Asia are the safest, based on their ranking.

ML - Risk ranking by regions

While placing Nigeria as the safest economy in the world seems extremely counter-intuitive, it’s worthwhile noting that many of ML’s riskiest countries/regions are those that experienced what the National Bureau of Economic Research called “capital flow bonanzas” in the past five years (Australia in 2007, the UK in 2005-2007, the US in 2002-2007, Romania in 2004, etc.) — leading to a higher risk of financial crises in those areas. It also tallies with ML’s global economic theme in recent months — impaired Anglo-Saxon consumers.
Related links:
Capital Flow Bonanzas: An Encompassing View of the Past and Present - NBER
An impaired Anglo-Saxon - FT Alphaville

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