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Moody's Sovereign Risk Report Summary

Core Content

This report from Moody's Analytics provides an analysis of sovereign credit risk measures, specifically the Expected Default Frequency (EDF), and related metrics such as CDS implied ratings and bond implied ratings for various countries. It highlights how changes in oil prices impact the economic and credit risk profile of oil-dependent economies, with a particular focus on Venezuela.

Main Points

• Oil Price Impact on Sovereign Risk:

  • The price of crude oil dropped to $46.47 from $49.19, affecting the sovereign credit risk of major oil exporters.
  • Venezuela's Sovereign EDF rose from 15.4% to 16.5% over the past week, reflecting its heavy reliance on oil.
  • Venezuela's economy is heavily dependent on oil, which accounts for 95% of exports and nearly half of government revenue.
  • The country's probability of default has shown a strong negative correlation with oil prices since 2013.

• Economic Challenges in Venezuela:

  • Venezuela continues to face rising consumer prices, strict currency controls, and shortages of basic goods.
  • A 60% increase in the minimum wage led to more violent protests, indicating growing social unrest.

• Comparison with Other Sovereigns:

  • Venezuela's Sovereign EDF is higher than 69 other sovereign entities in the dataset.
  • It is significantly higher than Greece (3.7%) and Ukraine (2.9%), which are the second and third-riskiest sovereigns.
  • The EDF of Venezuela aligns with Greece's level three months before its distressed-debt exchange in 2012.

• Market Indicators:

  • Government debt and CDS markets are pricing in a heightened risk of a Venezuelan default.
  • US dollar-denominated notes maturing in 2022 traded as low as 57, yielding over 32%.
  • The five-year CDS spread widened to 3,402bp from a peak of 10,384bp in February 2016.

Key Information

• Sovereign EDF Metrics:

  • Venezuela's 5-year EDF increased to 16.5%, while other major oil exporters like Russia and Colombia saw increases of 7.1% and 3.9%, respectively.
  • Saudi Arabia's 5-year EDF remained steady at 0.25%.

• Market Reactions:

  • The Sovereign EDF is a measure used to assess the probability of default.
  • CDS spreads and bond prices reflect market expectations of sovereign risk and are used to infer credit ratings.

• Regional Analysis:

  • The report includes detailed tables for different countries, showing changes in Sovereign EDF, CDS implied ratings, bond implied ratings, and senior ratings across various time periods.
  • Countries like Australia, China, Hong Kong, and others are analyzed for their sovereign risk metrics, showing minimal changes or slight variations.

Summary of Key Metrics

Conclusion

The report underscores the significant impact of falling oil prices on Venezuela's economic and credit risk profile, highlighting its vulnerability and the potential for a sovereign default. It also provides a comparative analysis of sovereign risk across various countries, showing how market signals and credit ratings are used to assess risk and investment opportunities.