Pillar 4: Macroeconomic stability

What does it capture? The level of inflation and the sustainability of fiscal policy (see Box 2 for further explanation).

Why does it matter? Moderate and predictable inflation and sustainable public budgets reduce uncertainties, set returns expectations for investments and increase business confidence—all of which boost productivity. Also, in an increasingly interconnected world where capital can move quickly, loss of confidence in macroeconomic stability can trigger capital flight, with destabilizing economic effects.

4.01 Inflation

Annual percentage change in the Consumer Price Index. | 2016–2017 moving average

Inflation is normalized in a U-shaped function to capture the detrimental effects of high inflation and deflation. Countries with inflation rates between 0.5% and 4% receive the highest possible score of 100. Outside this range, scores decrease linearly as the distance between the optimal value and the actual value increases.

Source: International Monetary Fund (IMF).

4.02 Debt dynamics

Index measuring the change in public debt-to-GDP ratio, weighted by a country’s credit rating and debt level in relation to its GDP. | Difference between the 2017 and 2018 expected values of the debt-to-GDP ratio

This indicator is a category-based min-max normalization of the debt change. The debt change is the difference between the 2017 and 2018 of the debt to GDP ratio expected values. To transform the debt change value into a 0 to 100 score, each country is assigned to a specific category that determines the value boundaries. Categories are based on three criteria: general credit rating, government debt to GDP level for the year 2017, and country classification (1 if country is considered advanced, 0 otherwise according to IMF’s classification).

The general credit rating for each country is computed as the average of Fitch, Standard and Poor’s (S&P) and Moody’s credit ratings.

A country classification by rating :

Based on these criteria, 12 cases are identified:

i) if a country’s average rating is “investment grade 1” and its debt to GDP level is less than 60%, its debt change is normalized to 100;

ii) if a country’s average rating is “investment grade 1” and its debt to GDP level is less than 110%, its debt change is normalized to a score between 90 and 100;

iii) if a country’s average rating is graded as “investment grade 1” and its debt to GDP level is greater than 110%, its debt change is normalized to a score between 80 and 90;

iv) if the average credit rating is rated as “investment grade 2” and the debt level is lower than 110%, its debt change is normalized to a score between 70 and 80;

v) if the average credit rating is “investment grade 2” and the debt level is greater than 110%, its debt change is normalized to a score between 60 and 70;

vi) if the average credit rating is “speculative”, the debt level is less than 110%, and the country classification is “advanced”, its debt change is normalized to a score between 50 and 60;

vii) if the average credit rating is “speculative”, the debt level is greater than 110%, and the country classification is “advanced”, its debt change is normalized to a score between 40 and 50;

viii) if the average credit rating is “speculative”, the debt level is less than 60%, and the country classification is “developing”, its debt change is normalized to a score between 40 and 50;

ix) if the average credit rating is “speculative”, the debt level is greater than 60%, and the country classification is “developing”, its debt change is normalized to a score between 30 and 40;

x) if the average credit rating is “default”, the debt change is normalized to a score between 0 and 30;

xi) if a country does not receive a credit rating from any rating agency and its debt level is below 60%, its debt change is normalized to a score between 40 and 50; and

xii) if a country does not receive a credit rating from a rating agency and its debt is above 60% of GDP, its debt change is normalized to a score between 30 and 40.

To determine the final value of the debt dynamics indicator within the assigned boundaries, we’ve calculated the normalized debt change, which ranges from a minimum observed value of 0 and the maximum observed value of 20. As part of the normalization process, we assigned a score equivalent to the minimum value of each bracket if the debt change was 20% or higher; assigned the maximum value of the bracket if the debt change was 0% or lower; and assigned a score between the two values if the debt change was between 0% and 20%.

Source: World Economic Forum; calculations based on data from International Monetary Fund and the rating agencies Fitch, Moody’s, and Standard and Poor’s.