Euromoney’s risk survey pinpoints mispriced oil-exporter credits

By:
Jeremy Weltman
Published on:

Russia’s and Venezuela’s plight was predicted by Euromoney’s country risk survey well before the market priced in their deteriorating creditworthiness. Other, similarly ranked oil-producing sovereigns could endure a similar fate.

Russia’s increased risks have seen the sovereign slide 17 places in Euromoney’s global risk rankings this year, and its bond yield rise to a five-year high of almost 12.67% this week with sharply widening credit default swap (CDS) spreads.

Russia’s score of 46.3 points from a maximum 100 puts it less than three points (and two places) higher than Gabon, another net oil producer issuing $1.5 billion-worth of dollar bonds over 10 years at a yield of just 6.375%.

That’s half the borrowing cost, despite its risk indicator scores equally as weak.

"Russia has strong reserves and is not in danger of becoming insolvent, but its political risk is adding shock value," says Kojo Amoo-Gottfried, an analyst at FM Capital Partners.

 Euromoney surveys more than 400 economists and other experts worldwide, who are asked to provide values for 15 economic, political and structural risk indicators.

These are added to scores for capital access, debt indicators and credit ratings to yield a total risk score on a scale of zero to 100 (denoting maximum safety).

Nigeria, Africa’s largest oil producer, is 13 places worse off than Russia in 86th place, on a total risk score of just 40.1 (see table).

Yet its yield of 6.13% is similar to Ghana and Angola than Russia, in spite of its higher perceived level of risk. Algeria and Azerbaijan are similarly ranked.

Oil producer yields have increased in the past few weeks, reacting to the oil price slide.

What will happen next, though, "depends on how governments react, whether oil prices remain low and what actions are taken, in terms of higher interest rates or structural reforms", says Amoo-Gottfried.

Good call on Russia

Country-risk experts have a decent record of pre-empting market risk, and were concerned about Russian bond safety well before its five-year CDS spreads began to fall sharply and its 10-year sovereign bond yields escalated in tandem with the oil price and the rouble’s slide.

Russia’s risk score has plunged on the back of a longer-term sliding trend, pinpointing long-held and widespread concerns over its mispriced debt.

The score continued falling from March through to June, when Russia’s sovereign CDS spread, measuring the cost of insuring against default, tightened briefly from 278 basis points to just 166.

Experts nonetheless took a contrarian view, marking down its economic, political and structural risk-indicator valuations, including economic growth, currency stability and other quantitative and qualitative risk metrics.

Russia’s CDS spreads have since moved out by 100bp in a three-week charge through to December 8, with the sovereign’s 10-year borrowing costs responding to Russia’s economic decline and prospects for a tightening of monetary policy.

 

Mirrored in Venezuela

The risk trend for Venezuela, LatAm’s largest oil producer, has followed a remarkably similar pattern.

Its risk score has fallen sharply over several years to a lowly 26.4, putting the sovereign among a distinct group of highest-risk defaulters, rooted in the lowest of Euromoney Country Risk’s five tiered groups.

Experts have continued to downgrade its score this year, even as its CDS spreads tightened from February through July, and have since fallen through the floor on the oil price slide.

This article was originally published by ECR. To find out more, register for a free trial at  Euromoney Country Risk.