Frontier Sovereign Rating Model for Q1 2018

Blog icons - SovRatings-FrontMktsWe have produced the following ratings model to assess relative sovereign risk in Frontier Markets.  A 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 Frontier Markets covered by our model is currently 39.

FRONTIER RATINGS SUMMARY

There have been 17 rating actions since our last update in November.  There were 11 positive actions and 6 negative, continuing the improving trend last year.  For all of 2017, the actions were 29 positive and 33 negative, which represents a 53% share for the negatives.  This is an improvement over 2016, where 60 actions out of the 73 total (82%) were negative.

The deterioration in credit quality of the Frontier Markets in recent years largely reflects the negative impact from slower global growth and low commodity prices.  Given that this trend appears to be reversing, we look for further improvement in Frontier ratings as we move through 2018.  Of course, there will be divergences within Frontier Markets, just as we have seen divergences in the Emerging Markets.

Since our last update, Fitch has been the most negative with four moves.  Fitch downgraded Namibia from BBB- to BB+ with stable outlook and Oman from BBB to BBB- with negative outlook.  It also moved the outlook on Costa Rica’s BB rating and Pakistan’s B rating from stable to negative.

On the flip side, Fitch provided five positive moves.  It upgraded Bulgaria from BBB- to BBB, Serbia from BB- to BB, and Croatia from BB to BB+, all with stable outlook.  Fitch also moved the outlooks on Argentina’s B rating and Mongolia’s B- rating from stable to positive.

Moody’s downgraded Nigeria from B1 to B2 with stable outlook.  On the other hand, it upgraded Argentina from B3 to B2 and Mongolia from Caa1 to B3, both with stable outlooks.    Elsewhere, S&P downgraded Jordan from BB- to B+ and Angola from B to B-, both with stable outlooks.

S&P also leaned more positive, just like the other two agencies.  The two negative moves saw Oman downgraded from BB+ to BB and Bahrain from BB- to B+, both with stable outlooks.  On the flip side, S&P had twice as many positive moves.  It upgraded Bulgaria from BB+ to BBB- and Serbia from BB- to BB, with stable outlooks.  S&P also moved the outlook on Sri Lanka’s rating from negative to stable and on El Salvador’s rating from stable to positive.

Frontier Sov rating model Q1 2018

FRONTIER RATINGS OUTLOOK

Despite improving global growth and higher commodity prices, we see persistent downgrade risk ahead as signaled by the negative outlooks that are still hanging over many of the countries.  Improving credit metrics for the commodity exporters will most likely be an early 2018 story.  Again, there will be some exceptions as divergences are likely to remain in play.

Asia

All five countries in this region saw steady implied ratings.  Bangladesh’s implied rating was steady at BBB/Baa2/BBB after rising a notch last quarter.  We see strong upgrade potential to actual ratings of BB-/Ba3/BB-.  Sri Lanka saw its implied rating steady at BB-/Ba3/BB- after rising a notch last quarter.  Upgrade potential remains in play for actual ratings of B+/B1/B+.  Mongolia’s implied rating was steady at B-/B3/B- after rising a notch last quarter.  This puts it right at actual ratings of B-/B3/B-.

Vietnam’s implied rating remained steady at BBB-/Baa3/BBB-.  We still see upgrade potential for actual ratings of BB-/B1/BB-.  Pakistan’s implied rating was steady at BB-/Ba3/BB- after falling a notch last quarter.  There is still some upgrade potential for actual ratings of B/B3/B, but it’s ebbing.

Africa

Most countries in this region saw steady implied ratings.  However, more than a third saw their implied ratings rise.  Botswana’s implied rating rose a notch to A/A2/A, recouping half of the two-notch drop last quarter.  However, this still suggests very little upgrade potential for actual ratings of A-/A2.  Mozambique’s implied rating improved two notches to CCC+/Caa1/CCC+.  This moves it above actual ratings of SD/Caa3/RD.

Angola’s implied rating rose a notch to B+/B1/B+, recouping half of the two notches lost earlier this year.  This puts it slightly above actual ratings of B-/B2/B.  Nigeria’s implied rating rose a notch to BB-/Ba3/BB-, moving it slightly above actual ratings of B/B2/B+.  Ghana’s implied rating rose a notch to BB-/Ba3/BB- and so we see growing upgrade potential to actual ratings of B-/B3/B.

Tanzania’s implied rating was steady at BBB-/Baa3/BBB- after rising a notch last quarter.  However, it is not rated by the major agencies.   Algeria’s implied rating was steady at BBB-/Baa3/BBB- after rising a notch last quarter but it too remains unrated by the agencies.

Uganda’s implied rating was steady at BB/Ba2/BB after rising a notch last quarter.  This still suggests ongoing upgrade potential to actual ratings of B/B2/B+.  Zambia’s implied rating was steady at BB/Ba2/BB after rising two notches last year, keeping it well above actual ratings of B/B3/B.  Cote d’Ivoire’s implied rating was steady at BB+/Ba1/BB+ after falling several notches over the course of last year, but we still see upgrade potential for actual ratings of Ba3/B+.

Mauritius’ implied rating was steady at BBB/Baa2/BBB after falling a notch last quarter.  This suggests ongoing downgrade risks to Moody’s sole rating of Baa1.  Namibia’s implied rating was steady at BB/Ba2/BB, but still suggests ongoing downgrade risks for actual ratings of Ba1/BB+.  Kenya’s implied rating was steady at B+/B1/B+, which puts it right at actual ratings.

There was only one country that saw its implied rating fall this quarter.  Tunisia’s implied rating fell a notch to B/B2/B, which moves it slightly below actual ratings of B1/B+.  

Latin America and Caribbean

Most countries in this region saw steady implied ratings.  However, a quarter saw their implied ratings fall. Argentina’s implied rating was steady at B+/B1/B+ after rising a notch last quarter.  This still suggests some upgrade potential for actual ratings of B+/B3/B, as Macri’s reform program bears fruit.

Jamaica’s implied rating was steady at BB/Ba2/BB.  This still suggests some upgrade potential for actual ratings of B/B3/B.   El Salvador’s implied rating was steady at BB/Ba2/BB.  Guatemala’s implied rating was steady at BBB/Baa2/BBB, but still sees some upgrade potential to actual ratings of BB-/Ba1/BB.

The Dominican Republic’s implied rating was steady at BB+/Ba1/BB+ after falling a notch last quarter.  This still suggests some upgrade potential to actual ratings of BB-/Ba3/BB-.   Trinidad & Tobago’s implied rating was steady at BB+/Ba1/BB+ after falling a notch last quarter.  This suggests ongoing downgrade risks to S&P’s BBB+ rating.  Moody’s Ba1 rating is on target, however.

Costa Rica’s implied rating fell a notch to BBB-/Baa3/BBB-.  However, it remains above actual ratings of BB-/Ba2/BB.  Bolivia’s implied rating fell a notch to BB/Ba2/BB, which moves it closer to actual ratings of BB/Ba3/BB-.  

Eastern Europe

Most countries in this region saw steady implied ratings.  Ukraine bucked the trend as its implied rating improved a notch for the second straight quarter, from CCC- to CCC.  This is still largely below actual ratings of B-/Caa2/B-, however.

Serbia’s implied rating remained steady at BB+/Ba1/BB+.  This still suggests some upgrade potential for actual ratings of BB-/Ba3/BB-.  Bulgaria’s implied rating was steady at BBB+/Baa1/BBB+ after rising a notch last quarter.  This suggests ongoing upgrade potential for actual ratings of BBB-/Baa2/BBB.  Croatia’s implied rating was steady at BBB-/Baa3/BBB- after improving a notch last quarter, which shows ongoing upgrade potential to actual ratings of BB/Ba2/BB+.  Kazakhstan’s implied rating was steady at BB-/Ba3/BB- after falling a notch last quarter.  There are ongoing downgrade risks to actual ratings of BBB-/Baa3/BBB.

Romania’s implied rating fell a notch to BBB-/Baa3/BBB-, resuming the fall after remaining steady last quarter.  We no longer see upgrade potential to actual ratings of BBB-/Baa3/BBB-.   

Middle East

Most countries in this region saw steady implied ratings, as higher oil prices help the exporting countries in this region stabilize.  Indeed, Saudi Arabia’s implied rating was steady at A-/A3/A-.  This keeps it close to actual ratings of A-/A1/A+.

Jordan’s implied rating was steady at BB-/Ba3/BB- after falling a notch last quarter, and suggests some upgrade potential for actual ratings of B+/B1/NR.  Lebanon’s implied rating was steady at CCC/Caa2/CCC, which still suggests strong downgrade risks to actual ratings of B-/B3/B-.  Bahrain’s implied rating was steady at B/B2/B after falling a notch last quarter.  However, it is still facing strong downgrade risks to actual ratings of B+/B1/BB+.

Oman’s implied rating fell a notch to BBB/Baa2/BBB.  This moves it closer to actual ratings of BB/Baa2/BBB-, though it’s clear that the agencies are split.  Kuwait’s implied rating fell a notch to BBB+/Baa1/BBB+.  This moves it further below actual ratings of AA/Aa2/AA.

CONCLUSIONS

It is clear that fundamentals are still worsening for some countries across the Frontier Markets universe.  Much of this was driven by slow global growth and low commodity prices.  These trends have already started to reverse, however, and so we expect to see an improving sovereign credit story as we move through 2018.  We believe that our model will help to identify the potential winners and the losers within this divergence theme.