Australia, New Zealand, Japan, Hong Kong, Singapore, Taiwan, and Israel have been listed as the top seven countries with the least financial risk in the world, according to the Economist Intelligence Unit (EIU)
The world leader in global business intelligence & market insights said in a recent report titled ‘Managing Financial Risk Amid Global Uncertainty, that financial risk is lowest in advanced economies.
“The 27 countries with an overall country risk score (defined as the average of the sovereign, currency and banking sector risk scores) corresponding to a risk rating of A or above are dominated by Western Europe and North America but also include advanced economies in Asia (Australia, New Zealand, Japan, Hong Kong, Singapore, and Taiwan), and Israel,” the report said.
It said just below this group, the 23 countries with an average rating of BBB are more diverse, including southern European states such as Italy, Portugal, and Spain, leading emerging-market economies such as South Korea, China and Mexico, and major Gulf oil states.
“At the other end of the scale, countries rated at CCC or below are clustered in the Middle East, Africa, and Latin America. They are also represented in Eastern Europe (Belarus, Russia, and Ukraine) and Asia (Sri Lanka, Pakistan and Myanmar),” it added.
The EIU financial risk country ratings measure sovereign, currency, and banking sector risks across 131 countries. Drawing on hard data and assessments by EIU country experts, the ratings are derived from 59 individual risk indicators that can easily be incorporated into other risk models.
“This gives managers a consistent, transparent, and independent measure of financial risk, which not only encompasses economic indicators but also includes political and institutional factors that may affect their global portfolio,” analysts at EIU said.
They added that financial risk focuses on three dimensions of cross-border financial risk, namely that of a sovereign default, a decline of 25 per cent or more in the value of the currency over 12 months, and a failure of 10 percent or more of the banking system by asset value.
“Each of these risk categories is measured by combining a set of specific risk factors, such as fiscal or sectorial indicators, with a broader range of underlying political, economic, and financial risk factors,” they said.
According to the firm, sovereign, currency, and banking crises tend to occur together, and ratings for the three risk categories will be similar.
“However, some countries perform better or worse on a particular dimension; for instance, in terms of sovereign risk, countries with large sovereign wealth funds, such as Norway, Gulf oil exporters, and Singapore, score better than their overall risk profile would suggest.”
It said in contrast, some Sub-Saharan African states with a history of defaults and a wavering commitment to pay, including Cameroon, Congo, and Equatorial Guinea, are rated lower for sovereign risk than for overall country risk.