Frontier Sovereign Rating Model for Q4 2015

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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 5 rating actions since our last update in July. There were 4 negative actions and 1 positive. Frontier countries have been overwhelmingly downgraded so far this year. Of the 35 actions taken so far, 10 were positive and 25 were negative. This follows an equally 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 Q4 and in 2016. Of course, there will be divergences within Frontier Markets, just as we have seen divergences in the Emerging Markets.

S&P provided the lone positive move, upgrading Ukraine from Selective Default (SD) to B- with a stable outlook. We do not agree with this upgrade, as our model shows Ukraine’s score still deteriorating further into D territory.

On the other hand, Fitch provided 2 negative actions on Ukraine during this period. Fitch downgraded Ukraine from CC to C with a negative outlook and then followed up with another downgrade to Restricted Default (RD). Elsewhere, Fitch downgraded Angola by a notch to B+ with a stable outlook, while Moody’s downgraded Mozambique by a notch to B2 with a negative outlook.


Despite this fairly quiet quarter, we see 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 as we move into 2016. Again, there will be some exceptions as divergences are likely to deepen.


Ratings and scores were mixed. Bangladesh’s implied rating fell a notch to BBB-/Baa3/BBB- and suggests diminished upgrade potential for actual ratings of BB-/Ba3/BB-. Vietnam’s implied rating rose a notch to BBB+/Baa1/BBB+, signaling strong upgrade potential to actual ratings of BB-/B1/BB-. Mongolia saw its implied rating fall two notches to B-/B3/B-, which signals strong downgrade risk to actual ratings of B+/B2/B+.


The results were mostly worse. Mauritius saw its implied rating fall two notches to BBB/Baa2/BBB, which signals downgrade risk to its lone Baa1 rating. Algeria saw its implied rating fall a notch to BBB-/Baa3/BBB-. Nigeria saw its implied rating slip a notch to BB+/Ba1/BB+, bringing it more in line with actual ratings of B+/Ba3/BB-. Implied ratings for Namibia and Tunisia both slipped a notch to BB+/Ba1/BB+ and B+/B1/B+, respectively. Both face rising downgrade risks. Ghana’s implied rating slipped a notch to B/B2/B, bringing it more in line with actual ratings of B-/B3/B. Cote d’Ivoire and Kenya bucked the regional trend, with implied ratings moving up a notch to BBB/Baa2/BBB and BB/Ba2/BB, respectively. Both are seeing increased upgrade potential.

Latin America and Caribbean

These countries were mostly steady to improved. Bolivia was an exception, as its implied rating fell a notch to BBB/Baa2/BBB but still remains above actual ratings of BB/Ba3/BB.   Both the Dominican Republic and Guatemala saw their implied ratings improve a notch to BBB/Baa2/BBB, suggesting stronger upgrade potential for both countries. Jamaica saw its implied rating improve a notch to BB-/Ba3/BB-, suggesting upgrade potential for actual ratings of B/Caa2/B-.


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 B-/Ca/RD.


Middle East

Most saw their scores worsen again as oil prices remain low. The Gulf countries in particular experienced mostly lower scores. Elsewhere in the Middle East region, Jordan’s implied rating improved a notch to BBB-/Baa3/BBB-, above actual ratings of BB-/B1/NR and suggesting stronger 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 to continue, and we believe that our model will help to identify the winners and the losers within this divergence theme.