ABSTRACT
The emergence of the international debt problem in the early 1980s focused considerable attention on the effectiveness of country-risk analysis. External creditors have often been criticized for extending cross-border loans without properly assessing a borrowing country’s future debt-servicing capability. But country-risk analysis was poorly focused and included diverse techniques, tailored to individual tastes and prejudices, that often lacked clarity and predictive value. A common pitfall was the tendency to reduce the analysis to a uniform matrix of indicators or simple set of ratios that attempt to assess creditworthiness by comparing debt and debt-service payments with economic performance. This paper presents a new approach to estimating the balance of payments that is specifically tailored to external financing and debt analysis of developing countries. The effectiveness of this approach in documenting emerging balance-of-payments pressures is then demonstrated by reviewing economic conditions in Indonesia and India during the 1980s.
