Workstream 1.3 - Helping LICs and MICs understanding financial conditions - Financial Conditions Indicator

15 July 2021

This paper aims at taking stock of the progress achieved, as of April 2021, in creating synthetic indicators to measure financial conditions in developing countries, in accordance with the specifications of the project “Response and Recovery: Mobilising financial resources for development in the time of Covid-19”. The work presented herein draws on the conceptual framework defined in the literature on “financial stress”, which has mostly focused on advanced economies to date. In line with this literature, our indicators broadly result from a factor analysis on a large series of country-level financial variables. However, we implement numerous methodological innovations in order to better accommodate the specificities of low or middle-income developing countries, such as the “clustering” — or regrouping — of countries with similar financial conditions with a view to undermining the constraints relating to the scarcity or poor quality of financial data. The paper presents some preliminary and provisional results based on a dataset with 843 monthly or quarterly financial variables for 53 developing countries in total, including a world map highlighting five different clusters and the financial conditions indicators per se, for the two largest groups between January 2005 and July 2020, hinting, among other things, the respective magnitudes of the pandemic.