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Moody's Sovereign Risk Report Summary (25 January 2016)

Core Content

This report from Moody's Analytics provides an analysis of market-based sovereign credit risk measures, focusing on changes in the Sovereign EDF™ (Expected Default Frequency) and implied ratings across different regions and countries during the week ending January 22, 2016. It highlights how global events and economic conditions influenced these risk metrics and offers insights into the performance of major economies, particularly the BRICS group.

Main Points

• Global Sovereign Risk Trends: Market-based measures of sovereign credit risk were mixed globally. The Asia-Pacific region initially saw an increase in EDF metrics due to weak Chinese GDP data, but the metrics rebounded as the Chinese government injected liquidity and signaled readiness to intervene in case of market instability.

• Regional Performance:

  • Latin America: Recorded the largest weekly drop in average risk of default (16.83%), with Venezuela, Chile, and Peru showing the strongest improvements.
  • Middle East & Africa: Experienced an average 0.83% decline in Sovereign EDF, led by Turkey, Kazakhstan, and Saudi Arabia.
  • Europe: The average risk of default fell by 4.88%, with Slovakia and Hungary showing the most significant declines (22% and 18%, respectively).
  • BRICS: The group saw a slight increase in average Sovereign EDF from 0.94% to 1.02% since the beginning of 2016, despite a general decline since the 2009 financial crisis. The composite CDS-implied rating for BRICS stands at Ba3, and the bond-implied rating at Ba1, both below their average Moody's rating of Baa2.
    • Russia: Experienced the largest improvement in Sovereign EDF, dropping from 0.83% to 0.64% as oil prices rebounded. However, persistent low oil prices continue to pressure the economy.
    • India: Maintained a relatively stable Sovereign EDF (0.49%), with a slight increase in the 5-year EDF. Its economic stability is attributed to Prime Minister Narendra Modi's structural reforms.
    • China: Slightly increased in Sovereign EDF (from 0.31% to 0.32%), but its 5-year EDF rose to 0.32% from 0.26%.
    • South Africa: Its Sovereign EDF was revised from 18% to 0.18% due to a change in the reason for its vulnerability to the Fed rate hike, now attributed to a persistent, although shrinking, current account deficit.

• Market Signals: Investor optimism about emerging markets has been declining since 2013, as shown by CDS and bond-implied ratings. These ratings reflect the perceived credit risk and investment potential of sovereigns.

Key Information

• Sovereign EDF is a measure of the expected probability of default over a one-year horizon.
• CDS Implied Ratings and Bond Implied Ratings are market-based indicators that reflect investors' views on credit risk.
• Moody's Analytics provides these market-based credit risk analyses and is separate from the rating agency Moody's Investors Service.
• The report includes exhibits showing detailed changes in EDF metrics and implied ratings for various countries and regions.
• China's GDP and oil prices were key factors influencing credit risk in the Asia-Pacific region.
• Central Bank interventions, such as the ECB's monetary policy changes, had a notable impact on sovereign risk in Europe.

Summary of Key Changes

Conclusion

The report underscores the impact of global economic conditions, such as commodity prices, interest rates, and monetary policy, on sovereign credit risk. While some countries experienced declines in risk, others saw increases, particularly in the BRICS group, which remains vulnerable due to economic challenges, political instability, and demographic pressures. The Asia-Pacific and Europe regions showed mixed trends, with China's economic slowdown and oil price fluctuations playing a significant role in shaping the risk profile.