We have produced this ratings model to assist investors in assessing relative sovereign risk over a wide range of Developed Markets (DM), 30 in all. Scores directly reflect a country’s creditworthiness and its underlying ability to service sovereign debt obligations.
Each country’s score is determined through a weighted compilation of fifteen economic and political indicators, which include debt/GDP, current account/GDP, GDP growth, actual and structural budget balance, per capita GDP, political risk, banking sector strength, and inflation. We have changed the methodology slightly to include Net International Investment Position (NIIP) and the national savings rate.
These scores translate into a BBH implied rating that is meant to reflect the accepted rating methodology used by the major rating agencies.
DEVELOPED MARKETS RATINGS SUMMARY
There were 6 DM rating actions that have been recorded since our last update in May. 2 were positive and 4 were negative. For the year, the count stands at 5 negative and 7 positive. This comes after a year that was weighted more towards positive actions (21) than negative ones (16).
S&P upgraded Slovenia one notch to A with a stable outlook. We agreed with this move, as our model rates Slovenia at A/A2/A.
On the other hand, S&P downgraded the UK by two notches to AA with a negative outlook. Fitch matched this move, cutting the UK by one notch to AA with a negative outlook. Both moves came after the Brexit vote.
Moody’s downgraded both Austria and Finland by a notch to Aa1 with stable outlooks. We disagreed with both, as our model views the two nations as AAA/Aaa/AAA. Lastly, Moody’s upgrade Ireland by a notch to A3 with a positive outlook.
DEVELOPED MARKETS RATINGS OUTLOOK
The stronger AAA credits (mostly the dollar bloc, the Scandies, and the northern eurozone) easily maintained their position this round. For this group, model scores were generally stable or improved. Notably, Australia saw its score worsen but by not enough to move the implied ratings out of AAA territory.
Within the AA credits, Ireland saw its implied rating improve another notch to move it back into AAA territory. As such, there is even stronger upgrade potential for actual ratings of A+/A3/A. Malta and Iceland saw their scores improve, with the latter’s implied rating moving up a notch to AA+. There is strong upgrade potential for both countries. The UK and Belgium saw their implied ratings worsen a notch to AA-/Aa3/AA-. As such, there is increasing downgrade risks for both countries. Estonia and France saw small improvements to their scores but their implied ratings were steady. On the other hand, Japan’s score worsened but its implied rating was steady.
It’s worth noting that for the UK, there is ongoing downgrade risk due to the still-unfolding impact of the Brexit vote. The “yes” vote will most likely lead to significant economic disruptions and further downgrades.
Within the A credits, the story was one of improved scores. Lithuania and Latvia saw their implied ratings rise a notch to A+/A1/A+ and A/A2/A, respectively. Upgrade potential is seen for both. Slovenia and Slovakia saw improved scores, but their implied ratings remained steady. There is upgrade potential for Slovenia.
Within the BBB credits, the story was mixed. Spain’s implied rating was steady at BBB+/Baa1/BBB+, which is very close to actual ratings of BBB+/Baa2/BBB+. Portugal’s implied rating rose a notch to BBB/Baa2/BBB and suggests stronger upgrade potential for actual ratings of BB+/Ba1/BB+. While Italy’s implied rating fell a notch to BBB+/Baa1/BBB+, there is still some limited upgrade potential for Italy.
Within the BB credits, the implied rating for Cyprus was steady at BB/Ba2/BB. Cyprus still faces upgrade potential, however, as its implied rating is above current ratings of BB-/B1/B+.
Within the B credits, Greece’s implied rating was steady at B-/B3/B-. This still suggests some upgrade potential to actual ratings of B-/Caa3/CCC. Moody’s and Fitch seem too pessimistic.
Given the different path this quarter for scores and implied ratings, it is clear that fundamentals are still taking divergent paths for many countries across the DM universe. Many improved this past quarter, but some are still deteriorating. We continue to believe that our model helps to identify the winners and the losers within the ongoing divergence trend across most markets.