Frontier Sovereign Rating Model For Q2 2019

We have produced the following ratings model to assess relative sovereign risk in Frontier Markets. A 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.

We have replaced FDI as a share of GDP with Net International Investment Position (NIIP) as a share of GDP. We believe NIIP gives a better read on a nation’s vulnerability to shifts in international investment flows. However, we likely saw some larger than usual changes in the implied scores this quarter as a result of the change in methodology.

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 Frontier Markets covered by our model is currently 36 after the recent decision by MSCI to reclassify Argentina and Saudi Arabia from Frontier to Emerging status.

 

FRONTIER RATINGS SUMMARY

There have been 7 rating actions so far this year. There were 4 positive actions and 3 negative for a 57-43% split. In 2018, positive actions made up 46% of the total and so this year represents a slight improvement. 2016 was the worst for Frontier, where only 13 actions out of 73 total (18%) were positive, followed by an improvement to 47% in 2017.

The deterioration in credit quality of the Frontier Markets in recent years largely reflected the negative impact from slower global growth and low commodity prices. Given that this trend appears to have reversed, we look for further improvement in Frontier ratings as we move through 2019. Of course, there will be divergences within Frontier Markets, just as we have seen divergences in the Emerging Markets.

So far this year, S&P has been the most positive. It upgraded Vietnam a notch to BB with stable outlook. S&P also upgraded Croatia to investment grade BBB- with stable outlook.

On the other hand, Moody’s has been the most negative with 2 moves. It downgraded Lebanon a notch to Caa1 with stable outlook. Moody’s also downgraded Oman a notch sub-investment grade Ba1 with negative outlook.

Fitch has been more balanced. It downgraded Costa Rica two notches to B+ with negative outlook. On the other hand, Fitch moved the outlook on Vietnam’s BB rating from stable to positive and upgraded Jamaica a notch to B+ with stable outlook.

 

 

 

FRONTIER RATINGS OUTLOOK

Asia

Most countries in this region saw steady implied ratings. Sri Lanka saw its implied rating fall two notches to B/B2/B, which moves it right in line with its actual ratings. Mongolia’s implied rating rose a notch to B/B2/B, which keeps it pretty much right at actual ratings of B/B3/B. Vietnam’s implied rating remained steady at BBB-/Baa3/BBB-. We still see upgrade potential for actual ratings of BB/Ba3/BB. Bangladesh’s implied rating was steady at BBB-/Baa3/BBB- after falling a notch last quarter, and it is flirting with sub-investment grade BB+/Ba1/BB+.

 

Africa

Most countries in this region saw steady implied ratings. Starting with the A category, Botswana’s implied rating was steady at A/A2/A and still suggests very modest upgrade potential for actual ratings of A-/A2. Moving down to the BBB category, Mauritius’ implied rating rose a notch to BBB/Baa2/BBB but still suggests ongoing downgrade risks to Moody’s sole rating of Baa1. Algeria’s implied rating was steady at BBB-/Baa3/BBB- but it remains unrated by the agencies. Tanzania’s implied rating was steady at BBB-/Baa3/BBB-. However, it too is not rated by the major agencies.

Going into the BB category, Cote d’Ivoire’s implied rating was steady at BB/Ba2/BB after falling a notch last quarter. For now, the deterioration seen over the course of the last year may be over. Nigeria’s implied rating was steady at BB/Ba2/BB, which still suggests upgrade potential for actual ratings of B/B2/B+. Angola’s implied rating was steady at BB/Ba2/BB, which suggests upgrade potential for actual ratings of B-/B3/B. Namibia’s implied rating was steady at BB-/Ba3/BB- and still suggests downgrade risks to actual ratings of Ba1/BB+. Lastly, Uganda’s implied rating was steady at BB-/Ba3/BB- and still suggests some modest upgrade potential to actual ratings of B/B2/B+.

Looking at the B category, Ghana’s implied rating was steady at B+/B1/B+ but we still see modest upgrade potential to actual ratings of B/B3/B. Kenya’s implied rating was steady at B/B2/B, which still suggests some downgrade risks to actual ratings of B+/B2/B+. Zambia’s implied rating was steady at B/B2/B and keeps it slightly above actual ratings of B-/Caa3/B-. Tunisia’s implied rating rose a notch to B-/B3/B- but remains below actual ratings of B2/B+ and still facing downgrade risks. Lastly, Mozambique’s implied rating fell a notch to CCC-/Caa3/CCC-, which moves it closer to actual ratings of SD/Caa3/RD.

 

Latin America and Caribbean

Most countries in this region saw steady implied ratings. The Dominican Republic’s implied rating was steady at BBB-/Baa3/BBB- after rising a notch last quarter. This still suggests upgrade potential to actual ratings of BB-/Ba3/BB-.   El Salvador’s implied rating was steady at BB-/Ba3/BB- after rising a notch last quarter, keeping it well above actual ratings of B-/B3/B-. Costa Rica’s implied rating was steady at BB+/Ba1/BB+ and keeps above actual ratings of B+/B1/B+. Jamaica’s implied rating was steady at BB-/Ba3/BB- and still suggests some upgrade potential for actual ratings of B/B3/B+.

There were three outliers in the region. Guatemala’s implied rating fell a notch to BBB-/Baa3/BBB-, but this still suggests some upgrade potential to actual ratings of BB-/Ba1/BB. Trinidad & Tobago’s implied rating fell a notch to BBB/Baa2/BBB, giving up a third of its gains last quarter. Lastly, Bolivia’s implied rating rose a notch to BB+/Ba1/BB+, which moves it further above actual ratings of BB-/Ba3/BB-.

 

Eastern Europe

Most countries in this region saw steady implied ratings. Bulgaria saw its implied rating steady at BBB/Baa2/BBB, which suggests very little upgrade potential for actual ratings of BBB-/Baa2/BBB. Ukraine saw its implied rating steady at B-/B3/B- after rising a notch last quarter, continuing the steady improvement seen over the past year to move near actual ratings of B-/Caa2/B-. Romania saw its implied rating steady at BB+/Ba1/BB+ after falling a notch last quarter. We still see some downgrade risks to actual ratings of BBB-/Baa3/BBB. Lastly, Croatia’s implied rating was steady at BBB-/Baa3/BBB- after rising a notch last quarter, which still suggests some upgrade potential for actual ratings of BBB-/Ba2/BB+.

There were two outliers in the region. Serbia’s implied rating fell a notch to BB/Ba2/BB, which suggests very little upgrade potential for actual ratings of BB/Ba3/BB. On the other hand, Kazakhstan’s implied rating rose a notch to BBB-/Baa3/BBB- for the second straight quarter, which pretty much erases downgrade risks to actual ratings of BBB-/Baa3/BBB.

 

Middle East

Most countries in this region saw steady implied ratings. Oman’s implied rating was steady at BBB-/Baa3/BBB- and keeps it slightly above actual ratings of BB/Ba1/BB+. Bahrain’s implied rating was steady at B+/B1/B+ after rising a notch last quarter, which suggests little downgrade risks to actual ratings of B+/B2/BB-. Lastly, Kuwait’s implied rating was steady at A+/A1/A+ after rising a notch last quarter. This keeps it close to actual ratings of AA/Aa2/AA.

There were two outliers in the region. Jordan’s implied rating rose a notch to B+/B1/B+, reversing the one notch drop last quarter. This puts it right at actual ratings of B+/B1/NR. Lebanon’s implied rating rose a notch to CCC/Caa2/CCC, which still suggests ongoing downgrade risks to actual ratings of B-/Caa1/B-.

 

CONCLUSIONS

It is clear that fundamentals are still worsening for some countries across the Frontier Markets universe. Much of this is being driven by slow global growth. However, some commodity prices have rebounded and so we expect to see more of an improving sovereign credit story in Frontier markets as we move through 2019. We believe that our model will help to identify the potential winners and the losers within this divergence theme.