The CFR Sovereign Risk Tracker can be used to gauge the vulnerability of emerging markets to default on external debt.¹ On the map below, the darker the red the more vulnerable the country. The CFR Sovereign Risk Index value suggests the likelihood of a country defaulting within five years. The highest value, 10, means that the country has a 50 percent or higher chance of defaulting. (The only Tracker country now in actual default is Venezuela.2) Mouse over (or tap) the map to see how each country scores on the Index and eight other indicators of risk.
In addition to the CFR Sovereign Risk Index, the eight other indicators of risk are:
1. Current account balance as a share of GDP. A country that imports more than it exports funds the difference with foreign capital inflows. Should these flows dry up, the country would have to pay for imports with foreign exchange reserves.
2. External debt as a share of GDP. Principal and interest payments on external debt must be met with capital inflows or reserve sales.
3. Reserve-adequacy ratio. A country’s short-term external financing need (the current account deficit plus short-term external debt) is expressed as a share of foreign exchange reserves in order to assess how long a country could survive a sudden stop in capital inflows.
4. Government debt as a share of GDP. High levels of government debt reduce investor confidence in debt-service capacity.
5. Fiscal balance as a share of GDP. Government budget deficits increase the amount of government debt outstanding.
6. Foreign currency denominated debt as a share of GDP. A country with a high level of foreign currency denominated debt is vulnerable to exchange-rate moves, as the value of this debt rises when the local currency falls.
7. Index of political instability. Constructed by the World Bank, this index measures the likelihood of political instability or politically motivated violence: it ranges from 3 (most stable) to -3 (least stable). Instability typically prompts investors to withdraw money.
8. Credit default swap (CDS) spread. The CDS spread is a market-based measure of a country’s level of default risk.
For those countries with a CDS spread, we use it to determine the CFR Sovereign Risk Index value. For those without a CDS spread, the other indicators above are aggregated into the CFR Sovereign Risk Index value. This method closely approximates CDS spreads for those countries with spreads. Each indicator is scaled from 0 to 10 to be comparable.3
1. The countries included are those in the MSCI emerging and frontier market indexes, excluding four countries for which data were unavailable, plus six additional ones which are widely covered in the news (in bold): Albania, Argentina, Bahrain, Bangladesh, Belarus, Bosnia and Herzegovina, Botswana, Brazil, Bulgaria, Chile, China, Colombia, Croatia, Czech Republic, Egypt, Estonia, Ghana, Greece, Hungary, India, Indonesia, Jamaica, Jordan, Kazakhstan, Kenya, Korea, Kuwait, Latvia, Lebanon, Lithuania, Macedonia, Malaysia, Mexico, Morocco, Nigeria, Oman, Pakistan, Palestinian territories, Peru, Philippines, Poland, Qatar, Romania, Russia, Saudi Arabia, Serbia, Slovakia, Slovenia, South Africa, Sri Lanka, Taiwan, Thailand, Tunisia, Turkey, Ukraine, United Arab Emirates, Venezuela, and Vietnam.
2. S&P downgraded Venezuela’s foreign currency debt to “selective default” in November 2017, after the country failed to meet October interest payments. The International Swaps and Derivatives Association subsequently ruled that the unmet payments triggered limited payouts on sovereign credit default swaps.
3. We assign a rating of 10 to a country with a current account deficit of 10 percent of GDP or higher, external debt of 250 percent of GDP or higher, a reserve-adequacy ratio of 200 percent or higher, foreign currency debt of 200 percent of GDP or higher, a fiscal deficit of 10 percent of GDP or higher, and a political instability rating of -3. We assign a rating of 0 to a country with a current account surplus of 5 percent of GDP or higher, external debt of 0 percent of GDP, a reserve-adequacy ratio of 0 percent, foreign currency debt of 0 percent of GDP, a fiscal surplus of 5 percent of GDP or higher, and a political instability rating of 1 or higher. A 60 percent weight is given to political instability and the other variables each receive an 8 percent weight. If the reserve-adequacy ratio is unavailable we double the weight on the current account balance. If foreign currency debt is unavailable we double the weight on external debt.