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 changed the methodology slightly last year 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 4 DM rating actions that have been recorded since our last update in November. 2 were positive and 2 were negative. For all of 2016, the count was 12 negative and 10 positive. This comes after a similar showing last year, which was weighted slightly more towards positive actions (21) than negative ones (16).
Fitch downgraded Belgium one notch to AA- with a stable outlook. We agree with this move, as it now matches our implied rating as well as Moody’s Aa3 rating. Moody’s moved the outlook for its Baa2 rating on Italy from stable to negative. We do not agree with this move, as our model still has Italy at BBB+/Baa1/BBB+.
On the other hand, Moody’s moved the outlook for its B1 rating on Cyprus from stable to positive. We view this move as overdue, as our model now has Cyprus at BB+/Ba1/BB+. Indeed, the other two agencies line up more with us. S&P rates it BB and Fitch rates it BB-.
Lastly, S&P upgraded Iceland earlier this year by a notch to A- with stable outlook. This matches Moody’s A3, but remains well below our implied ratings of AA+/Aa1/AA+.
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. The notable outlier here was Germany, whose score worsened significantly but not by enough to endanger its AAA rating. The scores of US and Ireland also worsened but remain in AAA territory.
Within the AA credits, most scores were little changed. The major exception was the UK, which saw its implied rating worsen a notch to AA-/Aa3/AA-. While the impact from Brexit has yet to be fully felt, downgrade risks for the UK remain in play. The other notable outlier was France, which saw its score worsen significantly but not by enough to change its implied ratings of AA/Aa2/AA.
Within the A credits, most scores improved slightly. Slovakia saw its implied rating rise a notch to A+/A1/A+, which pretty much puts it right at actual ratings of A+/A2/A+. Slovenia, Lithuania, and Latvia were basically unchanged but all three face modest upgrade potential.
Within the BBB credits, most scores improved slightly. Implied ratings for Italy, Spain, and Portugal were all unchanged. Of these three, Portugal seems to enjoy the most upgrade potential, followed by Italy. Spain appears correctly rated, for the most part.
Within the BB credits, the implied rating for Cyprus rose a notch to BB+/Ba1/BB+. Cyprus still enjoys upgrade potential, as its implied ratings move further above actual ratings of BB/B1/BB-.
Within the B credits, Greece’s implied rating was steady at B/B2/B. This still suggests upgrade potential to actual ratings of B-/Caa3/CCC. Both 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.