CFR Sovereign Risk Tracker

Ben Steil, senior fellow and director of international economics at the Council on Foreign Relations, emails:

Emma Smith and I have created a new web-based interactive to spotlight looming emerging-market debt crises.  Please try it out.

In addition to the CFR Sovereign Risk Index, the tracker shows eight indicators of risk:

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.