DM Sovereign Rating Model For Q1 2019

We have produced this ratings model to assist investors in assessing relative sovereign risk over a wide range of Developed Markets (DM), 33 in all. We have decided to adhere to MSCI methodology and have moved Hong Kong, Israel, and Singapore from EM to DM.

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.  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 was only 1 DM rating action that was recorded since our last update. In 2018, there were 24 positive actions and only 3 negative. In 2017, the total was 26 positive and 2 negative. In 2016, the total was 12 positive and 10 negative and so there is a clear and very strong improving trend within DM in recent years that persisted through 2018.

S&P made the only move in DM. It moved the outlook on New Zealand’s AA rating from stable to positive.

DEVELOPED MARKETS RATINGS OUTLOOK

Within the AAA credits, most scores worsened. The stronger AAA credits (mostly northern eurozone and Scandies) easily maintained their implied ratings. Singapore and Hong Kong both entered the DM model universe as AAA credits. Of note, the US worsened modestly and moved back (barely) into AA+ territory. It has been going back and forth between AAA and AA+ for several quarters and still bears watching. If the tax cuts lead to further fiscal deterioration, this would push the US deeper into AA territory and likely trigger downgrades for the US.

Within the AA credits, most scores worsened. Japan’s implied rating worsened to AA-/Aa3/AA-, continuing last quarter’s deterioration. Still, there remains some upgrade potential to actual ratings of A+/A1/A. Slovenia’s implied rating fell a notch to AA-/Aa3/AA-, reversing last quarter’s improvement and suggesting lower upgrade potential for actual ratings of A+/Baa1/A-. Iceland dropped into AA+ territory from AAA previously, while Malta fell a notch to AA/Aa2/AA. Israel entered our model universe at AA-/Aa3/AA-, matching S&P but above Moody’s and Fitch at A1 and A+, respectively.

Within the A credits, most scores worsened. Lithuania moved back into A+ territory as its implied rating fell a notch, reversing last quarter’s improvement and suggesting lower upgrade potential for actual ratings of A/A3/A-. All other implied ratings were steady, however.

Within the BBB credits, all scores improved modestly. Italy saw its implied rating rise a notch to BBB/Baa2/BBB, reversing part of last quarter’s two-notch drop.

Within the BB credits, Greece’s score worsened modestly. However, implied ratings of BB-/Ba3/BB- still suggest upgrade potential to S&P’s B+ and Moody’s B3 ratings. Fitch’s BB- appears to be on target.

 

CONCLUSIONS

DM sovereign ratings remain largely intact. However, we note that many scores are deteriorating and likely reflects slowing global growth. This bears watching, to state the obvious. We continue to believe that our model helps investors identify dislocations and potential divergences in the agency ratings.