Frontier Sovereign Rating Model for Q3 2015

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


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. 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 38.


There have been 7 rating actions since our last update in May.  4 were positive and 3 were negative.  However, we believe this was counter-trend.  Frontier countries have been overwhelmingly downgraded so far this year.  Of the 31 actions taken, 10 were positive and 21 were negative.  This follows a bad 2014, when there were 17 positive actions and 30 negative ones.

This ongoing deterioration in credit quality largely reflects the negative impact from slower global growth and falling commodity prices. Given that this trend is likely to continue, we see renewed downward pressure on many Frontier ratings in H2. Of course, there will be divergences within Frontier Markets, just as we have seen divergences in the Emerging Markets.

This past period, S&P was the most upbeat of the three agencies, accounting for 2 of the 4 positive actions.  S&P upgraded the Dominican Republic one notch to BB- with a stable outlook, and upgraded Jamaica one notch to B with stable outlook.  We agreed with both moves, which were predicted by our model.  This moves them closer to our implied ratings, but we see further upgrade potential.

Fitch upgraded Bolivia one notch to BB with a stable outlook, while Moody’s provided the remaining positive action by upgrading Pakistan one notch to B3 with stable outlook.  We agreed with both upgrades, which were both predicted by our model too.  This moves them closer to our implied ratings, but we see further upgrade potential.

On the other side, Fitch provided 2 of the 3 negative actions during this period.  Fitch downgraded El Salvador by one notch to B+ with stable outlook, and downgraded Bahrain one notch to BBB- with stable outlook.  We disagreed with the downgrade to El Salvador.  However, we agreed with the cut to Bahrain and see further downgrade risk.  S&P provided the other negative action, downgrading Mozambique one notch to B- while keeping it on review for further downgrade.



We see a persistent downgrade risk ahead.  Many Frontier countries are highly dependent on commodity prices and exports, and so the macro numbers are likely to deteriorate further in 2015.  Again, there will be some exceptions as divergences are likely to deepen.


Ratings and scores were generally steady.  Bangladesh’s implied rating of BBB/Baa2/BBB also suggests upgrade potential for actual ratings of BB-/Ba3/BB-.  Vietnam and Sri Lanka both still face strong upgrade potential as well.  On the other hand, Kazakhstan saw its score worsen slightly, and still faces downgrade risk to its BBB/Baa2/BBB+ ratings.  Mongolia saw its implied rating rise a notch to B+/B1/B+, which puts it pretty much at its actual ratings.


The results were mostly worse.  Botswana saw its score worsen and implied rating fall a notch to A/A2/A, which brings it into line with actual ratings.  Algeria saw its implied rating fall a notch to BBB/Baa2/BBB.  Angola saw its implied rating slip a notch again to BB+/Ba1/BB+, bringing it more in line with actual ratings of B+/Ba2/BB-.   Implied ratings for Tunisia and Kenya both slipped a notch to BB-/Ba3/BB-, both closer to actual ratings and so not signaling imminent downgrade risk yet.

Those that escaped the carnage in Africa were Mauritius, Namibia, Cote d’Ivoire, Nigeria, Tanzania, Uganda, Mozambique, and Ghana.  Their implied ratings were steady this round.  This group for the most part has implied ratings that are still above actual ones, and so future deterioration in the implied ratings would most likely just bring them more in line with actual ratings.

Latin America and Caribbean

These countries were mostly steady or improved. Costa Rica’s implied rating rose a notch to BBB+/Baa1/BBB+, which signals upgrade potential for actual ratings of BB/Baa1/BB+. Trinidad & Tobago saw its score improve but the implied rating was steady at A-/A3/A-. This still suggests some downgrade risk to S&P’s A rating. Bolivia’s implied rating rose a notch to BBB+/Baa1/BBB+, and still remains well above actual ratings of BB/Ba3/BB. Guatemala saw an improved score. While its implied rating was steady, there is still upgrade potential for its actual ratings of BB/Ba1/BB. Argentina remains problematic, as its B+/B1/B+ implied rating suggests an ability to pay that is not reflected in the actual ratings of SD/Ca/RD.

Eastern Europe

Implied ratings were mostly steady.  Romania, Bulgaria, Serbia, and Croatia saw little change to their scores.  Bulgaria’s implied rating of BBB/Baa2/BBB is slightly higher than actual ratings of BB+/Baa2/BBB-, and so there is modest upgrade potential.  Romania’s implied rating of BBB/Baa2/BBB also suggests modest upgrade potential for its BBB-/Baa3/BBB- ratings.  Serbia’s implied rating of BB/Ba2/BB suggests upgrade potential for actual ratings of BB-/B1/B+.

On the other hand, Croatia appears properly rated at BB/Ba1/BB.  Ukraine remains problematic, as its score worsened.  The implied rating remains at D, putting it below current ratings of CC/Ca/CC and thus subject to strong downgrade and default risks.

Middle East

Most saw their scores stabilize after worsening the last round.  Of the Gulf countries, Oman, Kuwait, and Bahrain continue to face some downgrade risks.  Elsewhere in the Middle East region, Lebanon saw its score worsen but its implied rating was steady at B-/B3/B-, suggesting that downgrade risk to actual ratings of B-/B2/B remains in place.  Jordan’s implied rating was steady at BB+/Ba1/BB+, above actual ratings of BB-/B1/NR and suggesting some upgrade potential.


It is clear that fundamentals are taking divergent paths for many countries across the Frontier universe.  Much of this is being driven by slower global growth and lower commodity prices.  We expect this trend to continue, and we believe that our model will help to identify the winners and the losers within this divergence theme.