The financial crisis has rocked the globe and fundamentally changed the way we assess what makes a country successful.The Banker’s latest rankings, which focus on low leverage, reveal some surprising results. Charles Piggott reports

The financial crisis of 2008 turned the world on its head, and the way The Banker looks at risk has also been turned upside down. In this brave new world, the world’s most developed economies – and those most dependent on credit – have suddenly become the ones most exposed to potential disaster.

To find out who is most at risk, The Banker crunched all the available data to measure the financial and economic health of 184 countries.

Statistics that until recently were used as a measure of economic performance – such as levels of bank lending – are now main indicators of the risk of financial problems.

Too much leverage

Unlike previous country rankings, instead of rewarding the most developed financial markets with high scores, The Banker’s 2009 World Financial Health Index penalises countries that rely too heavily on financial leverage.

The results, based on 25 indicators of financial and economic health, are shocking. According to The Banker’s new financial risk model, Moldova, Chile, Bolivia and Peru are less likely to be affected by the current financial crisis than the US, UK or Japan. These countries may be poorer, but with a far lower reliance on credit and just a fraction of the leverage of developed markets, they are more insulated from financial meltdown than any developed country, according to our ranking.

In fact, not a single Group of 10 country makes it into the top 20. The highest ranked G10 country is Switzerland at 21, while Japan’s beleaguered economy ranks at 111 (although this is partly due to the fact that the World Bank tables do not give figures for Japan’s government deficit or interest payments).

Despite the recent crash in oil prices, the top three countries in the ranking all have large reserves of oil or gas. Norway comes top, followed by Russia and Kuwait. Singapore, which has high levels of savings, low levels of government debt and huge foreign exchange reserves, ranks fourth. The big surprise is Moldova, a small eastern European country with a gross domestic product (GDP) per capita of just $1830, ranks fifth. Moldova has very low levels of debt ($763 per capita, compared with the UK’s $171,000 per capita), and its banks have high capital-to-asset ratios of more than 17% and low levels of lending.

Fewer loans

According to the World Bank, banks in Moldova have extended loans worth just 35% of GDP, compared with the US, where domestic bank lending has reached 230% of GDP. Moldova pays just 2.8% of public sector revenues to service government debt but Italy, for example, spends 11.9% of government revenues on interest payments.

Including private sector borrowing, developed countries’ overall indebtedness relative to GDP rises to several times the levels of many developing countries. For example, Japan is a rich country with GDP per capita of just under $38,000, but banks in Japan have extended domestic credit equal to a staggering 308% of GDP – far higher than any other country in the world. In the US, domestic bank lending has reached more than 230% of GDP, nearly four times the world average.

According to World Bank indicators, Japan also has the highest level of government debt of any developed country, with public sector debt equal to 170% of GDP. Only Zimbabwe and Lebanon have higher levels, at 218% of GDP and 186%, respectively.

Other highly leveraged countries in the ranking include Ireland and the UK. Ireland (ranked at 82) has the highest external debt-to-GDP ratio of any country at more than 600% of GDP, followed by the UK (ranked at 58) with external debt of more than 300% of GDP.

In addition to high levels of borrowing, many major economies are also sustaining large trade deficits and suffering from faltering economic growth, while many developing countries enjoy trade surpluses, continued economic growth and far lower levels of debt relative to their annual GDP.

Even though household incomes remain lower in developing countries, they can take comfort from the fact that they were not part of the post-millennium credit boom.

Our ranking shows that, as a result, developing countries are now less highly leveraged relative to their wealth than rich countries and so less likely to suffer the consequences of a deep financial crisis.

METHODOLOGY

The Banker’s 2009 World Financial Health Index rates countries’ ability to weather the current financial and economic crisis. A total of 25 indicators were used to rate 184 countries according to economic stability, overall indebtedness, financial sector stability and government finances, giving them a total score. Figures in brackets show the maximum score available for each criteria. Countries were ranked according to each indicator. The top ranked country in each category received the maximum score (in brackets), the worst ranked scored zero. All countries in between were awarded points on a pro rata basis. Where data was unavailable, countries received a score of zero.

Economic stability (400)

(150) GDP growth forecast, 2009 (IMF, World Economic Outlook, November 2008)

(75) GDP/capita forecast, 2008 (IMF, World Economic Outlook, November 2008)

(75) GDP/capita forecast, 2009 (IMF, World Economic Outlook, November 2008)

(25) Unemployment, % (CIA, World Factbook 2008)

(25) Net national savings rates, % of GNI, (World Bank, World Development Indicators 2008)

(15) Current account balance forecast, 2008, % GDP (IMF, World Economic Outlook, November 2008)

(10) Current account balance forecast, 2009, % GDP (IMF, World Economic Outlook, November 2008)

(10) FDI Inflow, 2007, % GDP (Unctad, FDI Stat, November 2008)

(5) FDI Inflow, 2007 per capita (Unctad, FDI Stat, November 2008)

(5) FDI stock, 2007, % GDP (Unctad, FDI Stat, November 2008)

(5) FDI stock, 2007 per capita (Unctad, FDI Stat, November 2008)

Indebtedness (200)

(50) External debt, % GDP (CIA, World Factbook 2008)

(50) Debt, per capita (CIA, World Factbook 2008)

(50) Gross External Debt Position, % increase Q2 2007 to Q2 2008 (World Bank, November 2008)

(50) Public debt, % GDP (CIA, World Factbook 2008)

Financial sector stability (200)

(100) Bank regulatory capital to risk weighted assets (IMF, Global Financial Stability Report June 2008)

(25) Bank capital to assets (IMF, Global Financial Stability Report June 2008; World Bank, World Development Indicators 2008)

(25) Non performing bank loans (IMF, Global Financial Stability Report June 2008)

(25) Bank provisions/non performing loans, %, (IMF, Global Financial Stability Report June 2008)

(25) Domestic credit provided by the bank sector (World Bank, World Development Indicators 2008)

Government finances (200)

(80) Central government cash surplus or deficit (World Bank, World Development Indicators 2008)

(80) Central government debt interest, % of revenue (World Bank, World Development Indicators 2008)

(20) Reserves of foreign exchange and gold, % of imports (CIA, World Factbook 2008)

(10) Reserves of foreign exchange and gold, % GDP (CIA, World Factbook 2008/IMF; World Economic Outlook, November 2008)

(10) Reserves of foreign exchange and gold, per capita (CIA, World Factbook 2008)

* Where dates are unspecified, the figures are the latest available.

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