CFR Sovereign Risk Tracker

 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. (Four Tracker countries are in actual default: Belarus, Lebanon, Sri Lanka, and Venezuela.) 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, eight other indicators of risk are described below. For each measure, we use the most recent value available in the last eight quarters.

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 the countries with a CDS spread, we use it to determine the CFR Sovereign Risk Index value. For those without a CDS spread, we use S&P and Moody’s Sovereign Ratings or political-risk indicators. This method closely approximates CDS spreads for those countries with spreads.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, 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. To approximate CDS spreads with S&P and Moody’s sovereign ratings, we find the mean CDS spread for each sovereign rating. We then apply the mean CDS spreads to the countries with missing CDS spreads to estimate their CFR Sovereign Risk Index values. For countries with both missing CDS spreads and sovereign ratings (Belarus, Russia, and Venezuela), we predict CDS spreads using a linear model of six political-risk factors from the Worldwide Governance Indicators. While the macroeconomic indicators displayed in the tracker above provide relevant information on a country’s risk context, they fail to reliably predict a country’s CDS spreads or risk of default and, therefore, are not used to determine its CFR Sovereign Risk Index value.

Please also visit our Global Monetary Policy Tracker, Global Imbalances Tracker, Global Growth Tracker, Global Trade Tracker, Global Energy Tracker, and Central Bank Currency Swaps Tracker.