Macro Trend RisksEconomic trend data can show whether an economy is healthy or at risk, both in the short run and over a sustained period.
Key indicators include: real GPD trends, industrial output, inflation, unemployment, real wages, and interest rates. These economic trends are interactive. For example, short-term spikes in inflation or a sudden drop in the exchange rate can feed through to strains on the financial system or problems for sovereign and corporate external borrowing. Longer-term trends in growth, unemployment or competitiveness can test a country's ability to manage its corporate, banking and sovereign debts. Each year, the European Commission reviews the performance of the 28 EU members against a set of macro criteria. In the same way, the IMF performs annual Article IV reviews to assess macro imbalances.
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Strengths and Risks in Key Sectors
Fiscal and Public Sector. This is the traditional focus of country risk. Core indicators include: general government budget balances, primary balances (excluding the cost of interest payments), the need to roll-over or refinance maturing debt, overall public debt levels and the risk profile of this debt. Increasingly experts focus on the sources of public funding and the volatility of capital flows to governments.
External Sector Imbalances.
A country's foreign trade and external financial flows are critical sources of risk -- one of the triggers for "debt crises" recurring since the 1970's. Trends in foreign trade often reflect a country's relative competitiveness in the world economy. Other key indicators include the current account balance, real exchange rate, FX reserves, and capital flows into or out of the country. Countries heavily dependent on foreign loans and capital flows are often vulnerable to "sudden shocks" from events both within and outside the country. |
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