Reading 23: Capital Market Expectations－LOS k

If a government is supportive of structural reforms necessary for growth, then the investment environment is more hospitable. Growth rates less than 4% may indicate that the economy is growing slower than the population, which can be problematic in these underdeveloped countries.

Foreign debt levels greater than 50% of GDP indicate that the country may be overlevered. Debt levels greater than 200% of the current account receipts also indicate high risk. Current account deficits (roughly speaking, imports are greater than exports) greater than 4% of GDP can be problematic because the deficit must be financed through external borrowing. High risk is also indicated when foreign exchange reserves are less than the short-term debt that must be paid off in one year.

Small economies are often heavily dependent on the sale of commodities and their undiversified nature makes them susceptible to volatile capital flows and economic crises.