EM Sovereign Rating Model for Q1 2016

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We have produced the following Emerging Markets (EM) ratings model to assess relative sovereign risk. An EM country’s score directly reflects its creditworthiness and underlying ability to service its external debt obligations. Each score is determined by a weighted compilation of fifteen economic and political indicators, which include external debt/GDP, short-term debt/reserves, import cover, current account/GDP, GDP growth, and budget balance.

These scores translate into a BBH implied rating that is meant to reflect the accepted rating methodology used by the major agencies. We find that our model is very useful in predicting rating changes by the major agencies. The total number of Emerging Market countries covered by our model stands at 30.


There have been 9 EM rating actions since our last update in October. 7 of them were negative, but 5 of these were concentrated on either Brazil or South Africa. Moody’s put Brazil’s Baa3 rating on review for downgrade. If so, it would simply match Fitch’s one notch downgrade to BB+ with a negative outlook. South Africa was cut by all three agencies. Fitch cut its rating one notch to BBB- with a stable outlook, S&P moved the outlook on its BBB- rating from stable to negative, and Moody’s moved the outlook on its Baa2 rating from stable to negative.

Elsewhere, Moody’s moved the outlook on Malaysia’s A3 rating from positive to stable. S&P moved the outlook on Egypt’s B- rating from positive to stable.

Moody’s was responsible for both positive rating actions. It moved the outlook on Russia’s Ba1 rating from negative to stable. Moody’s also upgraded Korea one notch to Aa2 with a stable outlook.

For 2015, there were 28 actions recorded; 10 were positive and 18 were negative. However, we note that virtually all of the negative actions have been on Brazil (7), Russia (4), South Africa (3), and Venezuela (2). Netting out those four countries, then all but 2 of the EM rating actions in 2015 were positive.


Many of the stronger EM credits (mostly in Asia) saw their scores improve or remain steady, and for the most part maintained their positions this round. On the other hand, many of the weaker credits saw their scores deteriorate, underscoring what we view as growing divergences within EM. Most of those seeing continued deterioration are commodity exporters, as the ongoing drop in prices is weighing on fundamentals. Our model suggests some noteworthy misalignments remain in place across EM.

In Latin America, virtually all scores worsened this round. This was largely due to the commodity-centric nature of the region.

Chile saw its implied rating fall a notch to A-/A3/A-. The fall in copper prices continues to take a toll, and actual ratings of AA-/Aa3/A+ are facing greater downgrade risks.

Brazil’s implied rating was steady at BB-/Ba3/BB-, even as its score sank closer to single B territory. Actual BB+/Baa3/BB+ ratings are subject to continued downgrade risk, with Moody’s likely to follow the other two into sub-investment grade.

Colombia, Peru, Ecuador, and Venezuela also saw their scores worsen, but none by enough to change their implied ratings. All four are more or less correctly rated. Mexico and Panama both saw steady scores, and both appear to be correctly rated as well. Uruguay was the only one in the region to improve this quarter, with its implied rating up a notch to BBB/Baa2/BBB, close to actual ratings.

In Asia, India continues to see reduced downgrade risk. Its score improved slightly and the implied rating is moving closer to BBB/Baa2/BBB territory. The same holds true for Indonesia. Its score improved and is right on the cusp of having its implied rating move into BBB/Baa2/BBB territory.

Hong Kong’s implied rating improved a notch to AA/Aa2/AA, moving it closer in line with actual ratings of AAA/Aa1/AA+. Elsewhere, Singapore, Korea, China, Taiwan, the Philippines, and Thailand all saw their implied scores remain steady. All of these countries appear to be more or less correctly rated.

Malaysia’s score worsened a notch to BBB/Baa2/BBB. This suggests growing downgrade risks to actual ratings of A-/A3/A-. Indeed, we disagreed with Fitch’s decision last year to move the outlook on its A- rating from negative to stable.

In EMEA, Russia’s score improved but its implied rating was steady at BB-/Ba3/BB-. We still see downgrade risks to actual ratings of BB+/Ba1/BBB- that would push it deeper into sub-investment grade territory. Fitch’s investment grade BBB- rating is clearly too high.
Turkey’s score worsened and its implied rating fell a notch to BB-/Ba3/BB-. It continues to face strong downgrade risks to its BB+/Baa3/BBB- ratings. The investment grade ratings given by Moody’s and Fitch seem premature now, but even S&P’s BB+ rating is subject to downgrade risk.

South Africa’s score worsened slightly but its implied rating was steady at BB/Ba2/BB. We believe actual ratings of BBB-/Baa2/BBB- are subject to growing downgrade risk, and the loss of investment grade is likely this year as the fiscal outlook deteriorates.

Hungary’s implied rating was steady at BB/Ba2/BB. It remains right on the cusp of moving into BB+/Ba1/BB+ territory and so we see only slight downgrade risk to Hungary. The Czech Republic saw its score improve but its implied rating was steady at A+/A1/A+, and appears correctly rated for now.

Poland’s score was steady and its implied rating remained at BBB/Baa2/BBB. While our model still suggests downgrade risks to actual ratings of A-/A2/A-, we believe that the rating agencies are unlikely to move until the new government clearly signals its policy intentions.

Qatar’s implied rating fell a notch to A+/A1/A+, and faces even stronger downgrade risk to its actual ratings of AA/Aa2/AA. Elsewhere, Egypt’s score worsened and pushed its implied rating down a notch to B/B2/B, putting it closer in line with actual ratings of B-/B3/B. Israel’s implied rating was steady at AA-/Aa3/AA-, but barely remains in this higher category. As such, upgrades to actual ratings of A+/A1/A are unlikely to be seen soon.

The UAE’s implied rating was steady at A-/A3/A-, suggesting ongoing downgrade risk to its lone Aa2 rating from Moody’s. Morocco’s implied rating was steady at BBB/Baa2/BBB, keeping it slightly above actual ratings of BBB-/Ba1/BBB-.

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Downgrades concentrated in Brazil, Russia, South Africa, and Venezuela last year suggests that there are still idiosyncratic negative risks within EM. Lower commodity prices are also likely to continue having a negative impact on the commodity exporting countries, whilst benefiting the importing countries. As such, we continue to warn investors that EM fundamentals will still diverge across countries. The investment climate remains challenging, with fundamentals remaining the most important factor for global investors to consider.