ECR: In search of the next investment-grade sovereign

Jeremy Weltman
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Identifying countries ripe for an investment-grade rating is a complicated task, with the main rating agencies differing in their assessments of credit risk. Euromoney’s Country Risk Survey highlights several borrowers with bright prospects, having successfully predicted the shift from junk status to investment grade for the Philippines earlier this year.

Finding the next investment-grade sovereign bond issuer is an important element of investment strategy, but one that is complicated by conflicting opinions among the raters amid the economic, political or structural angles to sovereign risk.

The methodology in the ECR survey, which uses the opinions of expert economists to calculate a risk score out of 100, is a well-established alternative to the rating agencies, not least because of its regular quarterly updates and rankings approach, with countries placed into five tiered groups based on their total scores.

The survey, with its fluid assessment of changing risks, can often unearth interesting anomalies in the agencies’ views. Long-term trend movements in scores are one important aspect of Euromoney’s approach.

Bang in line with its score trend in the ECR survey, the Philippines’ achieved investment-grade status this year from the three main rating agencies, the last of which (Moody’s) decided to close ranks with Fitch and Standard & Poor’s in early October.


Trend movements in ECR scores have foretold changes in ratings in many parts of the world, notably where Europe is concerned. Indeed, a closer inspection of recent ECR data highlights other possibilities for ratings actions, including Chile and Taiwan, and possibly Hungary and Romania in the longer term. Sri Lanka, meanwhile, would appear to be one of several candidates for investment grade if current score trends persist.

The survey had indicated a Philippines’ credit upgrade was long overdue, and it should prove resilient to the unprecedented disaster caused by Typhoon Haiyan, which has invariably caused the stock market to plunge, accentuating the country’s short-term risks, given the loss of human life, damage to agriculture and inevitable strain on public resources.

However, with Manila spared, and the rebuilding effort ultimately boosting the economy, the overall impact should be contained.

In any event, the Philippines’ prior long-term trend improvement, built on its solid growth fundamentals, fiscal consolidation, strong external balances, political stability and good governance remains intact. These features had all been highlighted in an array of ameliorating risk indicators during the past few years, taking the sovereign to the top of the fourth of ECR’s five tiered groups.

Its upward score trend was signalling stronger creditworthiness compared with no fewer than six investment-grade borrowers – Latvia, Romania, Namibia, Kazakhstan, Morocco and Azerbaijan – all ranking lower then, and still doing so, according to ECR.

A suggestion that this would see the Philippines soon rise into tier three – commensurate with investment grade – was subsequently proven correct.

Now the Philippines, placed 67th out of 186 sovereigns, two steps inside tier three on ECR’s global risk data table, is almost on a par with Indonesia one place above. The latter has suffered from emerging-market (EM) risk aversion in the wake of the US tapering threat, as the rupiah, like India’s currency and that of Ukraine, has succumbed to current-account deficit financing risks – contrasting with the strong Filipino surplus.

Keep an eye on Sri Lanka

Amid the latest round of EM risk aversion and the difficulties still plaguing the eurozone debt-crisis resolution, the question once more arises as to whether another new investment grade can be found?

And again the raters all seem to differ wildly in providing an answer, offering few possibilities.

Fitch has seven candidates close to investment grade (rated BB+). Of those, four are stable – Costa Rica, Croatia, Hungary and the former Yugoslav Republic of Macedonia – suggesting an upgrade is not likely anytime soon. Croatia, the highest ranking of those according to ECR, might be justified, although it has yet to embark on a rising score trend; neither has Costa Rica, the highest of ECR’s tier-four sovereigns.

Three more – Guatemala, Portugal and Tunisia – are negative according to Fitch and have all seen their scores fall, too, in the ECR survey, leaving not one candidate on a positive outlook.

Moody’s agrees with Fitch where Croatia is concerned and has two more Ba1 rated sovereigns, Guatemala and Ireland, both considered stable. Four more – the Bahamas, Hungary, Morocco and Slovenia – are rated negative.

S&P, meanwhile, has five sovereigns within its highest speculative grade (BB+), but as with Fitch and Moody’s, none is on review for an upgrade. Barbados and Croatia are rated negative, while Indonesia, Romania and Turkey are stable.

ECR data reveal the vast majority of its tier-three sovereigns, ranking from 35th to 68th, are investment grade according to one or more of the agencies. Cyprus and Portugal are obvious exceptions, while Barbados and Croatia are justified based on their long-term score trends of -7.8 and -12.8 respectively during the past three years.

Of the tier-four sovereigns, Hungary, having stabilized at 70th, is perhaps a solid long-term bet, bubbling under tier three, but only if it can put its recent problems behind it. Namibia and Romania, further below, are rated investment grade by at least two agencies.