When making investments in various countries, country risk is always a concern. How should such risk be measured? We suggest that the best metric is the standard deviation of GDP growth. With our metric, Australia has the lowest country risk, and Timor-Leste the highest.
Our method is similar to how corporate stock price risk is determined by beta. That is to say, by measuring volatility, one measures risk (and uncertainty). The benefits of this metric are:
- It is objective. The numbers cannot be tweaked to fit a particular agenda
- It is simple to calculate (so it can be checked)
- It corresponds–in our view–well with reality
That the metric is backward-looking may be a drawback, but history has a tendency to repeat itself. E.g., if a country’s GDP was sensitive to changes in oil prices 10 years ago, then it probably is so in the future as well.
We took GDP growth from 1970 until 2013 in constant local currency and calculated the standard deviation. The results below should be compared with the global median annual GDP growth of 3.7%.
Not surprisingly, affluent countries with well-diversified economies do well. Note though that Australia and Norway, which depend significantly on extractive industries, have low risk. It is also possible for emerging countries to have low risk. Pakistan and Colombia may come as surprises, but both countries have complex economies that are robust to shocks.
The high-risk countries are dominated by oil-dependent and war-torn countries, and a few small countries with undiversified economies.
Below you can screen by continent or country. Here are a few observations:
- China and India have low risks
- South American countries have fairly low risks. Colombia is the star, while Argentina and Venezuela are somewhat risky
- North America and Europe have low risks, except Eastern Europe
- Oil-based countries typically carry significant risks
- Africa has a wide spectrum of risks. South Africa, Kenya, and Tanzania perform among the best of the world, while Liberia, Libya, and Equatorial Guinea are very risky
Go to the second installment in this series: Currency Risk
Go to the third installment in this series: Inflation Risk
Go to the fourth installment in this series: Total Risk