DM Sovereign Rating Model For Q3 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 were six DM rating actions recorded since our last update, all positive. Fitch was the most positive with three, as it upgraded Slovenia one notch to A with stable outlook and moved the outlook on Malta’s A+ and Portugal’s BBB from stable to positive. Moody’s was next with two moves. It upgraded Malta one notch to A2 with stable outlook and moved the outlook on Slovenia’s Baa1 from stable to positive. Lastly, S&P upgraded Slovenia one notch to AA- with stable outlook.

So far in 2019, there have been 10 ratings changes in DM and 90% have been positive. This is basically the same as 2018, when positive moves made up 89% of the total. Similarly, positive moves made up 93% of the total in 2017, up sharply from 55% in 2016 and 57% in 2015. After the eurozone crisis, sovereign creditworthiness has climbed steadily.

 

DEVELOPED MARKETS RATINGS OUTLOOK

Within the AAA credits, scores were mixed. The stronger AAA credits (mostly northern eurozone and the Scandies) easily maintained their implied ratings. Hong Kong and Singapore worsened noticeably, due in large part to the regional impact of the US-China trade war. Of note, the US remained (barely) in AAA territory. It has been going back and forth between AAA and AA+ for several quarters and still bears watching. If there is further fiscal deterioration, we think it could push the US deep enough into AA territory to trigger downgrades.

Within the AA credits, scores were also mixed. Slovenia’s implied rating fell a notch to AA-/Aa3/AA-, reversing last quarter’s rise and suggesting somewhat less upgrade potential for actual ratings of AA-/Baa1/A. Belgium’s implied rating rose a notch to AA+/Aa1/AA+, suggesting greater upgrade potential for actual ratings of AA/Aa3/AA-. Lastly, Malta’s implied rating fell a notch to AA-/Aa3/AA-, suggesting somewhat less upgrade potential for actual ratings of A-/A2/A+.

Within the A credits, most scores worsened. The UK’s implied rating fell a notch to A+/A1/A+, pushing it down into single-A territory and suggesting greater downgrade risk to actual ratings of AA/Aa2/AA. Slovakia’s implied rating fell a notch to A-/A3/A-, suggesting greater downgrade risk to actual ratings of A+/A2/A+. Here, Spain stands out for the one-notch rise in its implied rating to A-/A3/A-, which pretty much puts it right at actual ratings of A-/Baa1/A-.

Within the BBB credits, scores were steady. Cyprus still has upgrade potential for its actual ratings of BBB-/Ba2/BBB-. On the other hand, there is still modest downgrade risk for Italy’s BBB/Baa3/BBB ratings.

Within the BB credits, Greece’s score improved modestly. Its steady implied rating of BB-/Ba3/BB- still suggests upgrade potential to S&P’s B+ and Moody’s B1 ratings. Fitch’s BB- appears to be on target still.

 

CONCLUSIONS

DM sovereign ratings remain largely intact. Some scores improved this quarter, but most were mixed. This likely reflects the impact of slower global growth this year. We continue to believe that our model helps investors identify dislocations and potential divergences in the agency ratings.