Country risk analysis : the case of Asean

Abstract

To analyze the country risk of four ASEAN countries during 1991 and 1996 as well as to investigate the extent to which macroeconomic forecasts have affected the country's cost of external borrowings. In analyzing the ASEAN country risk, six important macroeconomic variables, namely GDP growth, inflation, current account and budget balances, as well as foreign reserves and external debt positions, during 1991-96 were considered. The results suggest that, accompanying the region's overall rapid economic growth, the country risk of individual ASEAN economies increased to a relatively high level over this period, as indicated by their relatively high inflation rates, increasing current account deficits and rising levels of external debt. Furthermore, in examining the influence of macroeconomic forecasts on the country's cost of external borrowings, a pooled, cross-section, time series regression analysis relating cross-currency swap rates to forecasts of real GDP growth, inflation, current account deficits and percentage change in exchange rates as well as the market capitalization of the country's stock market was conducted for three selected ASEAN countries-Indonesia, Malaysia and Thailand, using monthly data from February 1996 to May 1997. The results show that the structure of these three countries' external borrowing costs were significantly determined by forecasts of their real GDP growth, inflation rates, currents account deficits and percentage change in exchange rates as well as their stock market capitalization. Therefore, in order for policy makers to reduce country risk and hence their external borrowing costs, a prudent application of the various policy instruments should be pursued to stimulate economic growth while limiting domestic inflationary pressures and current account deficits simultaneously.