Politicians keep telling us that, despite the situation being grim, they have the means to deal with the crisis and save our country’s economy from a long and deep recession. Even when thousands of people lose their jobs daily, they still come on television and tell us that “it will be alright”. The sad and simple truth is that politicians will pretty much say whatever it takes just to gain some public support. In fact, many of the economies hit worst by the current crisis are fairly limited in their ability to deal with it.

Briefly what is happening

In general, the prescribed medicine until now has been to pour money into the economy and cut taxes in order to stimulate consumption and investment. But money does not just come from thin air, it is either printed, thus creating inflation, or is borrowed. In general, central banks or governments try to avoid printing money, because if this leads to rampant inflation it would just worsen the situation. So in most cases, the only way to deal with economic crisis is to run a government deficit, which means cutting taxes in order to stimulate your internal market, while injecting money into the economy and praying that all this would actually work.

Moreover, as the world is highly interconnected nowadays, exporting countries which rely on Western markets for their products suddenly face a drop in demand. As their economies are threatened, the only solution is to try to move from the external market towards the internal market. But again this has its limitation if, for example, you are an oil exporting country, it is unlikely your internal market will be able to compansate for the loss of demand abroad. If you are like China, exporting manufactured goods, then there should not be any major obstacles for turning towards the internal market, provided you can stimulate your internal consumption.

The key elements

Taking this into consideration, by using some broad macroeconomic indicators you can predict which country is better prepared than others to deal with the crisis. In other words: who would be hit worse. Bear in mind, that this is just a broad picture: government leadership, structure of the economy, exporting partners and many other factors can also affect the evolution of events.

Public Debt – this is the debt gathered by the government. Chances are that the bigger this is, the greater is the difficulty of the government to run a deficit. Simply because when you have a lot of debts that you keep stacking, creditors know it is unlikely you will pay them, so they will be reluctant to lend you more money.

External Debt – this is the debt of the entire country to creditors outside it. The bigger this is,  the harder it is once again for the countrys` government and private sector to receive new loans.

Unemployment – The proportion of workers without a job and actively seeking one. In the current situation, if you have a high unemployment rate it probably means you already have some very big issues and the current crisis will probably matter little on top of the problems you already have.

Exports – The amount of good and services you sell to other countries. In the current situation, the more export orientated you are, the bigger the impact on your economy of the fall in the global demand for goods and services. However, in most situations you will be able to revert to your internal market, but this will not be without its costs.

Reserves of Foreign Exchange and Gold – the amount of foreign money and gold you have at your disposal. This money can be used for various means: in exchange for your own currency in case you need it to stimulate your own economy, pay external debts or lend it to other countries so that they can buy your products.

Stock of domestic credit – is the total amount of credit owned by non-banking institutions. Usually not a big deal, but in the current situation, the bigger this,  the larger the number of defaults. This will probably apply better to the states which were worse hit by the financial crisis.

GDP (exchange rate) – the value of all final goods and services produced within a nation in a given year. This value is calculated in the domestic currency and then transformed into USD at the official exchange rate.

GDP (PPP) – the value of all final goods and services produced within a nation in a given year. This value is calculated by evaluating the internal goods and transactions at their value in USA and thus directly in USD.

Building a rating

Putting the above elements together is not an easy task and requires some intuition. The result is by no means a strong predictor. Rather, it is an indicator of which countries will experience more difficulties than others.

The formula: R= [%Public Debt + ExternalDebt as % of GDP + (Exports as % of GDP)/2 – ForeignReserves as % of ExternalDebt – (ForeignReserves as % Exports)/2 + Domestic Credit as % of GDP]

The higher the rating, the less likely the country can deal successfully with the crisis. A world average is computed weighted by the countries economic power (GDP at PPP). And then, based on this average a score can be given.

The results

Unfortunately, there is not enough information to make this formula work for all countries, but there is still enough for 117. Here are the countries ranked by their crisis vulnerability (the higher the score the worse isthe situation for that country):

results2

Countries with scores above 60 are in a very bad situation. 40-60 - pretty bad, but probably a good crisis plan will get them ashore. 20-40 should not be very badly affected but this will depend on leadership. Below 20, some difficulties but generally the crisis will consolidate their position.

And the score of the biggest 20 economies in the world based on their PPP GDP.

Rank Country Vulnerability Score GDP PPP (real valure) (millions of USD)
16 European Union 45.67 14,546,184.50
24 United States 40.54 13,780,000.00
117 China (PRC) 0 7,099,000.00
18 Japan 43.33 4,272,000.00
111 India 17.26 2,966,000.00
13 Germany 47.5 2,807,000.00
4 United Kingdom 62.57 2,130,000.00
110 Russia 17.35 2,097,000.00
12 France 49.07 2,075,000.00
77 Brazil 27.48 1,849,000.00
20 Italy 42.9 1,800,000.00
15 Spain 45.68 1,361,000.00
81 Mexico 26.91 1,353,000.00
19 Canada 43.09 1,271,000.00
83 South Korea 26.75 1,206,000.00
62 Turkey 29.71 853,900.00
71 Indonesia 28.45 843,700.00
23 Australia 40.64 773,000.00
115 Iran 7.08 762,900.00
90 Taiwan 25.71 698,600.00
3 Netherlands 62.58 645,500.00

What does this tell us?

The highest ranked country is Zimbabwe. This may seem weird for some, but given that they currently have an inflation rate of over 230million % (yes, that is correct, 230 million) and that they rely heavily on loans from outside the country, this comes at no surprise.

However, other countries on top of the list are well developed countries. This is because they have a substational Public Debt as well as an External Debt which is sometimes 4 times the size of their GDP, their low foreign currency reserves also means they are somewhat limited in they ways they can help themselves. However, given their good economic performance until now it is likely they can still manage to deal with the situation, but the impact of the crisis will still lay heavily on them.

US has ranked quite well. This is because their External Debt is not very big in comparison with their GDP. Also they can probably rank even better (lower) because although officially they have low reserves of foreign currency they have the power to print dollars which is still a very powerful international currency.

On the other side of the big countries is Russia and China. Both countries have low public debts, low external debts and high reserves of foreign currency. For China the situation is still difficult because they rely heavily on exports, but this can be offset by the high level of foreign currency reserves. They can lend this money to other countries which in turn buy Chinese products with or exchange the money for Chinese currency and help their own economy. For Russia the situation is not that good, especially because they are primarily a gas and oil exporter and they just cannot replace foreign demand with internal one, they will have some difficulties but probably not a crisis.

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