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 now stands at 33, reflecting the recent decision by MSCI to reclassify Argentina and Saudi Arabia from Frontier to Emerging status.
EMERGING MARKETS RATINGS SUMMARY
There have been 10 EM rating actions since our last quarterly update. Of those, there were 6 positive actions and 4 negative actions. Positive actions made up 60% of the total, closely tracking the 61% for 2018 so far. In 2017, 20 positive actions made up 40% of the total moves, up from 29% in 2016. The moves seen so far in 2018 represent further improvement over the previous years, and suggest that EM ratings continue to improve after several years of downward momentum.
S&P has been the most positive agency this past quarter with 3 moves. It moved the outlook on the Philippines’ BBB rating from stable to positive. S&P also upgraded Egypt from B- to B with stable outlook and moved the outlook for Panama’s BBB rating from stable to positive.
Moody’s was the second most positive with 2 moves. It moved the outlook on Qatar’s Aa3 rating from negative to stable and moved the outlook on Israel’s A1 rating from stable to positive.
Moody’s was also the most negative agency this past quarter with 2 negative actions. It put Turkey’s Ba2 rating on review for possible downgrade and also moved the outlook on Pakistan’s B3 rating from stable to negative.
One positive and one negative move each came from Fitch. It moved the outlook on Qatar’s AA- rating from negative to stable. On the other hand, Fitch downgraded Turkey from BB+ to BB with negative outlook. S&P also had one negative move this past quarter. It downgraded Turkey from BB to BB- with stable outlook.
EMERGING MARKETS RATINGS OUTLOOK
Argentina enters our EM model universe at B+/B1/B+. S&P’s B+ looks to be on target, while some upgrade potential is seen for Moody’s B2 and Fitch’s B.
Brazil’s implied rating was steady at BB/Ba2/BB. Actual BB-/Ba2/BB- ratings are likely to be kept steady ahead of the October elections, especially since pension reforms are dead in the water.
Chile’s implied rating was steady at BBB+/Baa1/BBB+. The fall in copper prices has taken a toll and actual ratings of A+/Aa3/A are still facing some downgrade risk. Ecuador’s implied rating fell a notch to B+/B1/B+, moving it closer to actual ratings of B-/B3/B.
Colombia’s implied rating rose a notch to BBB/Baa2/BBB. This suggests S&P’s downgrade to BBB- was the last of the downgrades, and that Moody’s and Fitch are now on target at Baa2 and BBB, respectively.
Mexico’s implied rating remained steady at BBB/Baa2/BBB. Actual ratings of BBB+/A3/BBB+ are still facing downgrade risks, but much will depend on the policies of incoming President Andres Manuel Lopez Obrador.
Peru’s implied rating was steady at BBB+/Baa1/BBB+. As a major copper exporter, the fall in prices have fed through into weaker fundamentals. However, the outlook has improved and actual ratings of BBB+/A3/BBB+ appear to be largely on target.
Uruguay’s implied rating was steady at BBB/Baa2/BBB. This suggests that actual ratings of BBB/Baa2/BBB- remain largely on target. Similarly, Panama’s implied rating was steady and puts it right at actual ratings of BBB/Baa2/BBB.
Venezuela’s implied rating remained steady at D, though its score continued to deteriorate. While the recent recovery in oil prices will help most oil producers, we think years (decades?) of economic mismanagement have pushed Venezuela to the brink of default and deepening social upheaval.
China’s implied rating was steady at A+/A1/A+. S&P’s downgrade last year to A+ moves it into line with our model, as well as with Moody’s and Fitch.
Hong Kong’s implied rating was steady at AA-/Aa3/AA-. Singapore’s score remained steady and its AAA rating remains above reproach.
India’s implied rating was steady at BBB/Baa2/BBB. Several quarters ago, India was facing downgrade risks to its BBB-/Baa2/BBB- ratings. Now, we are seeing some modest upgrade potential.
Indonesia’s implied rating was steady at BBB+/Baa1/BBB+. Actual ratings of BBB-/Baa2/BBB are still enjoying some upgrade potential.
Korea’s implied rating was steady at AA/Aa2/AA after rising a notch last quarter. S&P’s AA and Moody’s Aa2 ratings appear to be on target, while Fitch’s AA- appears to have some upgrade potential. Taiwan’s implied rating was steady at AA-/Aa3/AA- after rising a notch last quarter. This keeps it right at actual ratings.
Malaysia’s implied rating was steady at BBB+/Baa1/BBB+. As such, modest downgrade risks to actual ratings of A-/A3/A- remain on the table. Thailand’s implied rating was steady at A-/A3/A- after rising a notch last quarter. As such, there remains upgrade potential for actual ratings of BBB+/Baa1/BBB+.
The Philippines’ implied rating was steady at BBB+/Baa1/BBB+. There is still some modest upgrade potential to actual ratings of BBB/Baa2/BBB. Pakistan’s implied rating was steady at B/B2/B, suggesting actual ratings of B/B3/B are largely on target.
The Czech Republic’s implied rating fell a notch for the second straight quarter to A-/A3/A-. As such, we are seeing rising downgrade risk to its AA-/A1/A+ actual ratings.
Hungary’s implied rating fell a notch to BBB-/Baa3/BBB-, giving back last quarter’s rise. This suggests no more upgrade potential for actual ratings of BBB-/Baa3/BBB-.
Poland’s implied rating remained steady at BBB/Baa2/BBB. As such, our model still suggests downgrade risks to actual ratings of BBB+/A2/A-.
Russia’s implied rating was steady at BBB/Baa2/BBB after rising a notch last quarter. Higher oil prices are boosting Russia’s numbers. Moody’s rating of Ba1 is lagging, but even the BBB- ratings from both S&P and Fitch are seeing some upgrade potential.
South Africa’s implied rating was steady at BB/Ba2/BB. We still believe Moody’s and Fitch’s ratings of Baa3 and BB+, respectively, are seeing continued downgrade risk. S&P’s BB rating appears to be on target.
Turkey’s implied rating fell a notch to B/B2/B, reversing last quarter’s rise. We still think Turkey faces very strong downgrade risks to its BB-/Ba2/BB ratings.
Qatar’s implied rating rose a notch for the second straight quarter to BBB+/Baa1/BBB+. However, it still faces strong downgrade risks to actual ratings of AA-/Aa3/AA-. The UAE’s implied rating was steady at A/A2/A after rising a notch last quarter, which still suggests strong downgrade risk to its lone Aa2 rating from Moody’s. Saudi Arabia enters our EM model universe at A/A2/A, suggesting some downgrade risk to Moody’s A1 and Fitch’s A+ ratings.
Elsewhere, Egypt’s implied rating was steady at B+/B1/B+. Actual ratings of B/B3/B are still enjoying some upgrade potential. Israel’s implied rating was steady at A+/A1/A+, keeping it right at actual ratings. Morocco’s implied rating was steady at BBB-/Baa3/BBB- after falling two notches last quarter, and so actual ratings of BBB-/Ba1/BBB- remain largely on target.
The heavy weighting of negative moves in EM in recent years continues to ease as we move through 2018. Low commodity prices had a negative impact on the commodity exporting countries, but those ratings should improve as the bounce in commodity prices continues. 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.