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MANAGING FINANCIAL RISK AMID GLOBAL UNCERTAINTY
PROTECT YOUR GLOBAL INVESTMENT PORTFOLIO

Managing financial risk amid global

uncertainty
Protect your global investment portfolio
EIU’s Financial Risk (FR) 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 FR, which not only encompasses
economic indicators but also includes political and institutional factors that may affect their
global portfolio.

Differences in financial risk across the globe

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. 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).

EIU's financial risk ratings, August 2023

(ratings represent the average of sovereign, currency and banking sector risk)

AAA
AA Hong Kong
A
BBB
BB
B
CCC Singapore
CC
C
D
N/A
Source: EIU Financial Risk.

1 © The Economist Intelligence Unit Limited 2023

MANAGING FINANCIAL RISK AMID GLOBAL UNCERTAINTY
PROTECT YOUR GLOBAL INVESTMENT PORTFOLIO

FR’s transparent, granular rating methodology breaks these differences down into 59 individual
risk indicators, scored on a five-point scale and grouped into five categories: politics and institutions,
economic policy, economic structure, macroeconomic conditions, and finance and liquidity. With FR
also giving users access to supporting analysis and underlying data, as well as explanations of score
changes at the individual indicator level, analysts are given the tools to understand the nuances of
risk for any country and communicate them clearly to stakeholders. This is particularly useful when
comparing countries near the middle of the rating distribution, where differences in risk are less
clear cut. For example, analysing the underlying risk indicator scores shows that BBB-rated countries
differ from their higher-rated peers in two main respects: their more fragile political institutions, and
their greater vulnerability to a tightening in global funding conditions. The main difference between
BBB-rated countries and those rated BB or below is their relative economic robustness: countries
rated at BB or lower tend to have higher public debt levels, larger external imbalances and economic
concentration in a smaller number of sectors.

2 © The Economist Intelligence Unit Limited 2023

MANAGING FINANCIAL RISK AMID GLOBAL UNCERTAINTY
PROTECT YOUR GLOBAL INVESTMENT PORTFOLIO
Three case studies: financial risk along the spectrum
Risk rating Australia
Country risk
Sovereign risk AA
Further consolidation in the
public finances is likely in 2023-
24, despite slower economic
growth. The Labor Party
administration has signalled its
commitment to fiscal prudence
and will back tax-raising
measures to fund cost-of-living
support. The public debt/GDP
ratio is low by OECD standards,
and most debt is denominated
in the local currency, mitigating
exchange-rate risk.
Currency risk AA
The risk of a sharp depreciation is
limited by strong fundamentals
and a current-account surplus,
which will persist in 2023-24,
even as global commodity prices
moderate. A lower terminal
policy rate than that in the US will
apply some downward pressure
on the currency.
Banking sector risk A
Tightening by the Reserve Bank
of Australia (the central bank) is
increasing mortgage repayment
costs amid high household
debt levels. Nonetheless, strong
prudential standards and a
high capital-adequacy ratio
suggest that the sector will
be able to absorb a rise in bad
assets without systemic issues
emerging.
3 © The Economist Intelligence Unit Limited 2023
Hungary
B CC
Public debt is the factor weighing
most heavily on the rating. Other
negative factors include a large
fiscal deficit that compares
unfavourably with the median
for B-rated economies, while
off-balance-sheet liabilities
are significant and increasing.
Supporting the rating is the
sovereign’s credible commitment
to servicing its debt, supported
by a strong track record of
honouring obligations.
BB
A compromise with the EU has
paved the way for the release of
bloc funds, which will support the
forint. However, the funds remain
frozen owing to a continued
rule-of-law dispute. That,
along with expected monetary
loosening in late 2023, will see
a return of forint weakness.
The possibility of tilt towards
risk aversion on global financial
markets threatens to undermine
precarious support for the local
currency.
BB
Hungary’s banking sector
emerged from the pandemic in
good shape to weather another
recession. Banks have a positive
net foreign asset position, which
supports stability in the financial
sector. However, negative real
interest rates weigh on the
rating, as do deficiencies related
to financial regulation and
supervision.
Argentina
A drought has led to a fall in
exports, a widening of the
current-account deficit and a
consequent erosion of foreign-
exchange reserves. Argentina
is relying on an extended fund
facility (EFF) deal with the IMF to
instil confidence in policymaking
and avert another default. Should
greater than expected policy
slippage cause the EFF deal to
falter, downside risks to the rating
would rise.
CC
Currency stability is threatened
by the recent drought and a high
level of political uncertainty as
the next presidential election
approaches. We assume that
tight exchange controls will
enable the authorities to
undertake an orderly currency
adjustment, but the risk of a
maxi-devaluation is high.
CCC
A contraction in GDP and
monetary tightening have
caused credit growth to falter,
although rising interest rates
have boosted profits. Crucially, a
low level of bad debts and firm
solvency indicators lowers the
risk of a banking crisis, even if the
economic downturn deepens.
MANAGING FINANCIAL RISK AMID GLOBAL UNCERTAINTY
PROTECT YOUR GLOBAL INVESTMENT PORTFOLIO

FR accommodates the differing importance of variables across developed and emerging markets,
as well as countries within the European Monetary Union, via three carefully calibrated versions of its
underlying model. For instance, the emerging-market model takes into account the inability of many
low- and middle-income countries to issue external debt in their home currencies—a limitation that is
seldom faced by developed markets. This allows Financial Risk users to compare sovereign, currency or
banking sector risk across all 131 rated countries directly.

Comparing sovereign, currency and banking sector risk

FR focuses on three dimensions of cross-border
financial risk, namely that of a sovereign default, a Median contribution of each risk category
decline of 25% or more in the value of the currency by rating range, August 2023
(average contribution to sovereign, currency and banking
over a 12-month period and a failure of 10% or sector risk score)
more of the banking system by asset value. Each of
AAA-A BBB BB-B CCC-D
these risk categories is measured by combining a 20
set of specific risk factors, such as fiscal or sectoral
indicators, with a broader range of underlying 15
political, economic and financial risk factors. In
practice, sovereign, currency and banking crises 10
tend to occur together, and ratings for the three
risk categories will be similar. However, some 5
countries perform better or worse on a particular
dimension; for instance, in terms of sovereign risk, 0
countries with large sovereign wealth funds, such Economic Economic Finance Macro- Politics/
policy structure and economy institutions
as Norway, Gulf oil exporters and Singapore, score liquidity /cyclical
better than their overall risk profile would suggest. Source: EIU Financial Risk.
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.

Top ten safest territories for sovereign, currency and banking sector risk (August 2023)
Sovereign Currency Banking
Norway Sweden Switzerland
Sweden Norway Canada
Denmark Canada Sweden
Singapore Denmark Finland
Switzerland Switzerland Norway
Australia Australia Denmark
United States Japan Australia
Canada Finland Germany
Netherlands Germany Japan
Germany Netherlands Singapore

4 © The Economist Intelligence Unit Limited 2023

MANAGING FINANCIAL RISK AMID GLOBAL UNCERTAINTY
PROTECT YOUR GLOBAL INVESTMENT PORTFOLIO

A new era of higher financial risk

FR ratings have a 12-month horizon, and are thus sensitive to cyclical changes in economic and financial
conditions. For instance, the distribution of ratings shifted in a markedly riskier direction at the height
of the 2008-09 global financial crisis and the covid-19 pandemic, and improved once the acute phase
of each crisis was over. However, the proportion of countries rated at A or higher has never fully
returned to its pre-2009 level, illustrating both the prolonged process of balance-sheet repair and the
political and economic scarring among advanced economies, particularly in Europe. The recovery in
the proportion of highly rated economies from covid-19 has been more rapid. Nevertheless, the share
of countries rated at B or worse–about 40% of the territories that we cover in FR–is still higher than
before the pandemic. This reflects the erosion of buffers against external repayment difficulties and
the impact of higher inflation, stoked in large part by Russia’s invasion of Ukraine. The resulting return
to higher interest rates on an international scale not seen in decades means that many countries find
themselves in a new era of heightened financial risk.

Distribution of ratings over time

(ratings represent the average of sovereign, currency and banking sector risk)
AAA AA A BBB BB B CCC CC C D
100

80

60

40

20

0
2007 08 09 10 11 12 13 14 15 16 17 18 19 20 21 22 23
Source: EIU Financial Risk.

5 © The Economist Intelligence Unit Limited 2023

Financial Risk
Monitor sovereign, currency and banking sector risk

Identify sovereign, currency and banking sector risks posed by political and economic developments
across 131 markets with our Financial Risk service. Combining EIU’s market-leading data and country
expertise in a rigorous risk-modelling framework, it enables you to determine risk across countries.

Why Financial Risk?

Unparalleled coverage
Assess the financial risks to your business posed by the political and economic situation in each
country, with up to 220 macroeconomic variables provided in each report.

Consistent methodology
Compare economic risk easily across countries, with a standardised format and forecasting
methodology.

Actionable intelligence
Download, manipulate, and analyse country risk assessment data in your own financial and risk-rating
models using our API for faster decision-making.

Information you can trust

Our country risk ratings are independent and impartial. Explore reliable data with information
gathered, checked and assessed by our in-house team of experts.

What’s included?
• Executive summary—all of the essential information covering the five main ratings categories
(sovereign, currency, banking, politics, and economic structure risk analysis).

• Financial risk analysis and outlook—explanations of the financial risk ratings, including any
positive or negative grade changes, as well as the ratings outlook for the next two calendar years.

• Our medium-term forecast—a two-year forecast of the political, economic, and external
payments situation.

• Data tables—forecasts and back series for a wide range of macroeconomic data relevant to
financial risk assessment, including the public finances, exchange rates, the banking sector, and the
external payments position.

• Regular event-driven economic analysis—updates are provided whenever events that affect our
financial forecasts occur.

Find out more information about our service features and how it could benefit your organisation by
visiting: eiu.com/financial-risk

6 © The Economist Intelligence Unit Limited 2023

Copyright

© 2023 The Economist Intelligence Unit Limited. All

rights reserved. Neither this publication nor any part
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While every effort has been taken to verify the

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Intelligence Unit Ltd. cannot accept any
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on this report or any of the information, opinions
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