One of the main areas in macroeconomic analysis is the long term prediction of economic growth on a national level. It is done for many reasons, such as a guide to see which countries sovereign debt products are safest or which country provides the economic stability to enable free market enterprises to flourish. There are many methods of doing national investment analysis that provide a benchmark on the best countries for long term growth and safe returns. As an economist I have developed my own methodology to analyse where the best investment opportunities reside on a national level.
I therefore call the method the Morganist National Investment Analysis or MNIA. In this model I first find out the long term sovereign debt surplus or deficit and then calculate the mean average over the last decade or two, if possible. This shows the level of dependence on outside investment each country has. Then I calculate the standard deviation of the borrowing over the same period to show the volatility. So why is this useful? Well, if there is high debt and a high standard deviation over that period it shows there is a period when the government had to borrow a lot more than at other times.
This indicates two things. The first is the country is following some kind of business cycle, which can then help an investor estimate each country’s business cycle with a closer analysis of the debt levels over the period measured. The second is the country has to borrow in the downturn period of the business cycle, which indicates that either the country’s domestic economy is reliant on fiscal stimulus to enable growth in the downturn period or that the boom period was created through outside investment. Either way a country with both high debt and a high standard deviation is an alarm bell to an investor.
Does it work? In my recent book on the Euro crisis I used the method to predict which countries would be next to default. I stated that Latvia, Lithuania, Hungary, Malta, Poland, Slovenia and Slovakia would have a sovereign debt increase in proportion to their GDP’s and may require intervention from outside sources. A recent article states that Olli Rehn, the European Commissioner for economic and monetary affairs, has issued a warning that Belgium, Cyprus, Hungary, Malta and Poland are on the brink of recession. Although my prediction did not include Belgium, its concern is mainly down to the problems with Dexia, which is a large owner of Greek debt. As a result I would suggest that Latvia, Lithuania, Slovenia and Slovakia could be added to the list.
If you are interested at having a closer look at the analysis you can download my book for free here. The analysis starts on page 25 and the tables are in the appendix.