EM Sovereign Rating Model For Q3 2020

The major ratings agencies continue to downgrade sovereign ratings across both EM and DM. Our own sovereign ratings model suggests that there is still more pain to come.

We have produced this updated ratings model to assist investors in assessing relative sovereign risk across the major Emerging Markets (EM). While the situation is still fluid with regards to the ultimate coronavirus impact on the global economy as well as the policy responses, we thought it would be useful to measure the potential ratings impact of this unprecedented economic crisis.

We have to stress that we are assuming that the ratings agencies have not changed their methodologies. Our own model was constructed on the long-standing metrics that help determine a country’s creditworthiness. With most countries blowing out their budget deficits and many engaging in Quantitative Easing, many lines have blurred. This bears watching, but the fact that we have already seen many EM downgrades (see below) this year suggests no change yet in the agencies’ way of thinking. Stay tuned.


There have been elven major EM rating actions recorded since our last model update in April. All have been negative and it will only get worse as the spread of the coronavirus continues. The downgrades have spread beyond the two special basket cases, Argentina and Ecuador. Indeed, these two only accounted for one downgrade since our last update in April.

S&P has made the most negative moves since our April update with four. It downgraded South Africa a notch to BB- with stable outlook. S&P also cut the outlook for Malaysia (A-), Chile (A+), and Panama (BBB+) from stable to negative. All of these moves are warranted.

Fitch was equally negative with four moves since our April update. It downgraded Argentina from C to Restricted Default. Fitch also moved the outlook for India (BBB-), Brazil (BB-), and Morocco (BBB-) from stable to negative. All of these moves are warranted.

Moody’s has made three negative moves since our April update. It downgraded India a notch to Baa3 with negative outlook. Moody’s also moved the outlook on Saudi Arabia (A1) from stable to negative and put Pakistan’s B3 rating on review for possible downgrade. All of these moves are warranted.

For the year so far, there have been only four positive moves compared to twenty-three negative ones. With all of the negative outlooks now in place, we look for more downgrades in H2 (and beyond).


Even within the stronger EM credits, scores were modestly worse. Only one score moved enough to change an implied rating and that was Taiwan, which dropped a notch to A/A2/A. This moves it further below actual ratings of AA-/Aa3/AA- and highlights rising downgrade risks. Korea and UAE are also facing continued downgrade risks.

Within the BBB credits, scores were mixed. The worst off were Qatar, Malaysia, and the Philippines, whose implied ratings fell to BBB+/Baa1/BBB+, BBB/Baa2/BBB, and BBB/Baa2/BBB, respectively. The first two face growing downgrade risks. India’s score worsened but its implied rating remained at actual ratings of BBB-/Baa3/BBB-, albeit right at the borderline with BB+/Ba1/BB+. On the other hand, Poland, Peru, and Hungary saw their scores improve enough to push their implied ratings up to BBB/Baa2/BBB, BBB/Baa2/BBB, and BBB-/Baa3/BBB-, respectively. However, all three still face downgrade risks.

Within the BB credits, scores were also mixed. Chile and Uruguay saw their scores worsen enough to push both their implied ratings down to BB+/Ba1/BB+. This suggests growing downgrade risks for both. On the other hand, South Africa and Egypt saw their scores improve enough to move their implied ratings up a notch to BB-/Ba3/BB-. South Africa still faces downgrade risks to its Moody’s and Fitch ratings of Ba1 and BB, respectively, while S&P appears to be on target.

Within the B credits, all scores worsened. However, only Panama and Ecuador saw their scores worsen enough to push their implied ratings down. Brazil and Turkey saw steady implied ratings, but both nations still face significant downgrade risks to actual ratings of BB-/Ba2/BB- and B+/B1/BB-, respectively.

Lastly, the worst credits got even worse. Pakistan’s implied rating fell a notch to CCC/Caa2/CCC, suggesting growing downgrade risks to actual ratings of B-/B3/B-. Venezuela moved further into default territory. Strangely enough, Argentina saw a slight improvement in its implied rating to CCC+/Caa1/CCC+.


EM sovereign creditworthiness is falling precipitously because of the virus. Virtually all model scores worsened, with many leading to significant downgrades to the implied ratings. While the ratings agencies have been focusing on corporate issuers recently, we believe sovereigns will be next to come under significant downgrade pressures. We continue to believe that our model helps investors identify dislocations and potential divergences in the agency ratings.


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. In order to make our model more forward looking, we used IMF forecasts for 2020 macroeconomic data across all countries.