Country Risk Analysis – Belguim

Country risk analysis is the foundation of international finance. In order to determine which countries are most hospitable to international investment, you begin with a quantitative analysis of the country’s macroeconomy and its debt burden. Here, you include drivers of credit spreads (which measure risk) such as the country’s economic performance, debt level, its government’s fiscal policies, and the central bank’s foreign currency reserves.

Separately, consider more diffuse factors such as political stability and transparency, the strength and stability of its institutions, demographic patterns, the overall health of its banks, the sustainability of economic policies, and the outlook for reforms.

You might get conflicting results. For example, one country may have a strong short-term debt service capability thanks to the high commodity prices its exports earn. However, that same country may have a political class that threatens to renegotiate its foreign debt. Thus, the more diffuse factors will outweigh the quantitative factors and make us leery of investing in that country. This all said, our analysis always will look at the following at a minimum:

Liquidity: ratio of FX reserves to ST debt, months import cover (reserves/total imports), and money supply (M2) to reserves
Balance of Payments: CAD % GDP, (CAD – FDI)% GDP, Cross border claims % Reserves (from BIS)
Solvency: Interest expense to total exports, Government debt to GDP, External debt to GDP
Fiscal: Interest payments/ Revenues, Fiscal Balance % GDP
Private credit: % GDP (5 yr change)
Commodity Price Sensitivity: which countries benefit and which ones are harmed by changes in commodities prices and what these changes might augur for inflation rates
Global Bank Exposure: which countries depend on bank financing from the US, Europe, and Japan
Developed Market Exposure: which countries are most dependent on trade with developed economies