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Our Analysts Conduct A Cross Check On The Outlook For The Current Account
Analysing the tradeable sectors
Our analysts conduct a cross-check on the outlook for the current account which is implied by the development of national savings and investment by examining in detail the prospects for the country's tradeable sectors. This includes a review of the evidence on price and non-price competitiveness; market share; geographical diversity of markets; and sectoral diversity of exports as between primary products and manufactures. Evidence of a strongly growing, diversified and competitive tradeable sector, able to hold its own or even expand its share of buoyant markets, is particularly impressive. This is the key to foreign exchange earning capacity.
We also determine the openness of the economy to international influences and innovations. An open trade policy will tend to go hand in hand with competitive industries, since companies protected behind high tariff barriers will tend to be inefficient. And where those protected industries are competitive, they will often prefer selling into the home market because higher prices make the home market more profitable than the exploitation of overseas markets. In the long run, tariffs or quotas without a clear timetable of reduction and removal may therefore impede a country's ability to earn foreign exchange.
Openness to investment - the treatment of foreign direct investment and the repatriation of profits and dividends - is also a positive factor in our assessment of the country's growth potential and hence its capacity to service debt. Other factors are the productivity trend not only in the tradeable sectors (like manufacturing) but also in services, since this will help to determine the efficiency with which business can be conducted throughout the economy.
The level of investment as a share of Gross Domestic Product is an important indicator of economic health and vitality, and we attempt to assess in particular the extent to which investment is being made in activities which can earn or save foreign exchange. In the long run, the counterpart to the build-up of debt ought to be a build-up of capacity to service that debt by earning foreign currency. We also use our expertise in the rating of banks to assess the sophistication and efficiency of financial intermediation, since this is a key source of the efficient allocation of national resources.
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