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Macroeconomic Analysis and Country Risk
First and foremost, we need to identify the structural growth path of the considered economy. This allows us to determine whether the country is indeed on a converging course, i.e. if its per capita income is increasing faster than that of developed countries. Different phases can usually be identified along the development process, takeoffs during which growth is strong and steady, phases of decline, and in some cases of aborted takeoffs. Those phases depend upon economic factors which we seek to identify: determinants of the stability of usual macroeconomic framework (inflation, public finances, and exchange rates), productivity gains, evolution of the production structure and export quality, etc.
This growth path analysis comprises a study of the cyclical aspects of growth, i.e. the short-term variations of the demand- or output-components of growth which may account for the last data available, whether yearly or, should the statistical apparatus allow it, quarterly. In the case of the countries of Western and Central Africa (WAEMU and CAEMC), the Research Department is equipped with a medium-term (two years) forecasting model, named JUMBO, used to examine the consequences of various probable or ongoing macroeconomic shocks.
Secondly, we look at the stability of the financial system. Central to this stability, the balance sheet situation of the banking sector (in terms of capitalisation, asset quality, profitability, liquidity and any type of maturity or currency mismatch) is sometimes difficult to assess due to the lack of such information. This static analysis may usefully be completed by examining the position of banks in the financial cycle: a high level of credit growth, inefficient credit intermediation and asset prices bubbles may indicate areas of financial vulnerability.
In view of the devastating banking crises that have been afflicting several developing countries over the last few decades, we deem it important to assess the soundness of financial systems through the use of a systemic risk approach. Indeed, such crises entail the public recapitalisation of financial institutions, which may be extremely costly (50% of GDP in Indonesia in the late 1990s) and which can paralyse public policy for years (by crowding out the active components of public spending, such as infrastructure and social expenditure). Moreover, banking crises generally lead to credit squeezes of varying lengths, detrimental to growth and development in the long term.
Thirdly, we analyse the public finances from the standpoint of the efficiency of the budget execution and of the sustainability of public indebtedness. We focus on whether such sustainability is endogenous or exogenous: in the first case, the government meets its payment obligations thanks to its own resources; in the second case, the government depends upon donor support in order to remain solvent, and may in some cases be very much exposed to adverse shocks.
We also project short- and medium-term public debt ratios, on the basis of our own assumptions (notably where growth rate and fiscal balance are concerned), to provide some perspective on the results provided by the IFIs public debt sustainability analyses.
Fourthly, we estimate the economy’s external financing need. The last two decades have shown that financial crises were often originated in external imbalances: the level of the external financing need and its coverage are two major issues of the pursuit of a development process. Furthermore, the sustainability of a country’s exchange policy can be assessed by its capacity to generate foreign currency receipts through exports and maintain satisfactory external liquidity ratios. Lastly, thanks to an external debt sustainability analysis model recently designed within the Research Department, we perform an external solvency and liquidity analysis, as well as a dynamic modelling of short- and medium-term external debt ratios.
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