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 5 DM rating actions that were recorded since our last update, all positive. For the year so far, the total is 9 positive and 1 negative. In 2016, the count was 12 negative and 10 positive and so there seems to be a clear improving trend within DM.
Fitch was the most positive, with three moves. It moved the outlook on Portugal’s BB+ rating from stable to positive. Fitch also moved the outlook on Japan’s A rating from negative to stable, and upgraded Iceland a notch to A- with positive outlook. We agree with all three moves.
Moody’s upgrade Greece a notch to Caa2 with positive outlook. We view this move as long overdue, as our model now has Greece at B+/B1/B+. The positive outlook bodes well. S&P and Fitch also have Greece too low at B- and CCC, respectively, and so we see upgrade potential there as well.
S&P upgraded Slovenia a notch to A+ with stable outlook. We agree, as this puts it right at our implied ratings of A+/A1/A+. Moody’s Baa3 and Fitch’s A- are too low, and we see upgrade potential there.
DEVELOPED MARKETS RATINGS OUTLOOK
Most of the stronger AAA credits (the dollar bloc, the Scandies, and the northern eurozone) saw their scores little changed, easily maintaining their standings this round. Note that by hanging on to its sharply improved score from last quarter, Iceland remains firmly in AAA territory in our model. The US improved modestly, moving it further into AAA territory.
Within the AA credits, all the scores except Japan’s improved. However, only Belgium’s score rose enough to move the implied rating up a notch to AA/Aa2/AA, suggesting some upgrade potential for actual ratings of AA/Aa3/AA-. Whilst its score was unchanged, Japan’s implied rating of AA/Aa2/Aa continues to suggest upgrade potential to actual ratings of A+/A1/A.
Within the A credits, scores were mixed. Of note, the UK worsened enough to move the implied rating down a notch for the second straight quarter to A/A2/A. This compares to actual ratings of AA/Aa1/AA. While the impact from Brexit has yet to be fully felt, downgrade risks for the UK should continue to intensify.
Elsewhere, Estonia saw its implied rating drop another notch to A/A2/A, and follows a two-notch drop last quarter. This suggests growing downgrade risks to actual ratings of AA-/A1/A+. On the other hand, Slovenia’s implied rating rose a notch to A+/A1/A+ to reverse last quarter’s drop. This suggests some upgrade potential to Moody’s Baa3 and Fitch’s A-.
Within the BBB credits, scores were mixed. The scores of Spain and Portugal improved, though only Spain’s rose enough to move its implied rating up a notch to BBB+/Baa1/BBB+ and reverse last quarter’s drop. Latvia remains in BBB territory after falling two notches last quarter, with growing downgrade risks seen for actual ratings of A-/A3/A-. Cyprus hung on to its recent gains as its implied rating stayed at BBB-/Baa3/BBB-, suggesting upgrade potential for actual ratings of BB+/B1/BB-.
Within the B credits, Greece’s implied rating rose a notch to B+/B1/B+. This suggests growing upgrade potential to actual ratings of B-/Caa2/CCC. All three 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. Most 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.