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 14 DM rating actions that were recorded since our last update, all positive save one. For the year so far, the total is 22 positive and 2 negative. In 2016, the count was 12 negative and 10 positive and so there is a clear and strong improving trend within DM.
S&P was the most positive with six moves. Five of these moved the outlook from stable to positive (for Lithuania, Greece, Cyprus, Latvia, and Malta), while one move saw Portugal restored to investment grade BBB- with stable outlook.
Moody’s had four positive moves. It upgraded Slovenia two notches to Baa1 with stable outlook, upgraded Cyprus one notch to Ba3 with positive outlook, and upgraded Ireland one notch to A2 with stable outlook. Moody’s also moved its outlook on Portugal’s Ba1 rating from stable to positive. Lastly, Moody’s accounted for the sole negative move this quarter, downgrading the UK by a notch to Aa2 with stable outlook.
Fitch had three positive moves and no negative ones. It upgraded Greece from CCC to B- with positive outlook, upgraded Malta a notch to A+ with stable outlook, and upgraded Cyprus a notch to BB with positive outlook.
DEVELOPED MARKETS RATINGS OUTLOOK
The stronger AAA credits (the dollar bloc, the Scandies, and the northern eurozone) easily maintained their standings this round. Of note, the US score deteriorated modestly, moving it very close to AA territory. This bears watching. Iceland remains firmly in AAA territory, suggesting upgrade potential to actual ratings of A/A3/A-.
Within the AA credits, most scores worsened modestly. Belgium’s score fell enough to move the implied rating, down a notch to AA-/Aa3/AA- and taking back the one notch improvement from last quarter. Ireland’s score fell enough to move back into AA territory, as its implied rating fell a notch to AA+/Aa1/AA+. However, it still enjoys upgrade potential to actual ratings of A+/A2/A.
Within the A credits, scores were mixed. Of note, the UK’s implied rating of A/A2/A continues to signal downgrade risks to actual ratings of AA/Aa2/AA, even though the impact from Brexit has yet to be fully felt. Elsewhere, Estonia should see ongoing downgrade risks to actual ratings of AA-/A1/A+. Lastly, Latvia improved back into low A territory and its implied rating is now equal to actual ratings of A-/A3/A-.
Within the BBB credits, scores were steady or improved. The scores of Italy and Portugal improved, with both implied ratings moving up a notch to BBB+/Baa1/BBB+. There is growing upgrade potential for both. Cyprus hung on to its recent gains as its implied rating stayed at BBB-/Baa3/BBB-, suggesting upgrade potential for actual ratings of BB+/Ba3/BB.
Within the B credits, Greece’s score improved but its implied rating was steady at B+/B1/B+. This still suggests upgrade potential to actual ratings of B-/Caa2/B-. 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.