FYI | Oct 20 2008
By Chris Shaw
With Iceland enduring an economic and financial collapse in recent weeks as the global credit crisis spread, Danske Bank has turned its attention to the countries that might be next. To do so the group searched for countries with a number of similar factors, both financial and political.
The financial factors include those nations with a large current account deficit, high credit growth in the past few years, those which have had or are going through asset market bubbles and those relying heavily on foreign currency funding. As well, the group attempted to identify countries that are commodity exporters, but that have failed to put something aside during the recent good years for when things again turned bad.
In terms of political issues, Danske Bank searched for signs of increased political risk, whether this be simply from domestic issues or as part of the broader geo-political environment.
The result was a list not of countries forecast to follow Iceland into financial crisis, but of countries where, as the group puts it, investors should be careful given the current uncertain global economic environment. Including Iceland a total of fifteen countries made the group’s list, all of which it suggests face the risk of a significant economic slowdown and therefore increased financial distress.
The countries represent a broad geographical and geopolitical spread, as South Africa is on the list along with emerging European nations Bulgaria, Estonia, Hungary, Kazhakstan, Lithuania, Latvia, Turkey and the Ukraine. In the Latin American region, Argentina and Venezuela have been identified, while the emerging Asian nations to make the list include Indonesia, Pakistan and South Korea.
As Danske Bank points out, the reasons for making the list differ for each country given there is a wide range of credit rankings, inflation conditions, structural issues and growth outlooks, but all have at least one reason for investors to take a cautious approach in terms of considering whether or not to invest in the current environment.