The COVID-19 shock affected the financial conditions in developing countries through many transmission channels, including capital outflows, plunges in commodity prices and currency depreciation.
Monitoring financial conditions in developing countries aims to provide early warning signals of “financial stress” before it has adverse effects on the real economy. The new generation UNCTAD FCI developed within this project provides a useful diagnostic tool for domestic financial conditions for developing countries, particularly for LICs and MICs whose data is typically too sparse to generate country specific analysis.
While the first UNCTAD FCI provided country-level financial stress indicators, the new generation UNCTAD FCI provides an assessment of the financial conditions in economically meaningful clusters of developing countries during the COVID-19 crisis. Harnessing the richness of information flows in the era of big data, a wide range of macroeconomic and financial variables is synthetized into one single indicator that contributes to understand the interplay of the main drivers of financial stress at the country level. Based on a measure of similarity between their respective financial conditions, the clusters do not necessarily match geographical regions, but may bring out new network patterns
We applied this innovative methodology to an in-house dataset of financial variables for 53 developing countries, which identified 5 clusters. For each country, the number of financial variables differ and ranges from 7 to 24 with 843 variables in total. The data include financial and macroeconomic variables (interest rates, exchange rates, GDP, commodity prices, capital flows, among others).
