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The risk of nations - economic

18/01/2015

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:

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%.

Bar Chart

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.

Bar Chart

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:

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