Year in data 2015: Country risk

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Euromoney Country Risk calls the shots on credit rating actions.

The more than 400 economists and credit experts taking part in the Euromoney Country Risk (ECR) survey kept up their excellent track record of predicting changes in sovereign credits in 2015.

Brazil had its credit rating downgraded from investment grade (BBB-) to junk status (BB+) by Standard & Poor’s in September – a move predicted by its ECR score trend. After sliding gradually lower from the beginning of 2012, Brazil’s ECR score fell more abruptly this year – before the rating action – edging closer to the fourth of Euromoney’s five tiered categories, broadly equivalent to a B- to BB+ rating. 

Country risk experts reacted to the political crisis surrounding president Dilma Rousseff’s government, following a corruption scandal at state-owned Petrobras. Falling commodity prices, soaring personal debt and unemployment made the ECR experts increasingly agitated.

chart-ecr-brazil

South Africa also suffered a negative score trend, pre-empting December’s downgrade from Fitch to BBB-, which puts the borrower one step away from losing its investment grade. ECR’s experts began reassessing its credentials mid-way through 2012, with the downgraded score resulting in a 10-place drop in the global rankings to 60th.

Experts focused on the impact of strikes and protests over education reform and the energy crisis weighing on South Africa’s infrastructure scores. The ECR commentary flagged the risks again in April this year, noting the experts’ lack of faith in economic growth, unemployment and currency stability. 

ECR also correctly forecast credit rating upgrades this year. Spain was raised to BBB+ by S&P in October almost two years after its score began to improve in line with its economy. Despite the political uncertainty surrounding December’s general election, Spain’s recovery has been remarkable. Real GDP growth of more than 3% for 2015 supported by domestic demand makes it one of Europe’s strongest economies. 

Cyprus, too, was odds on for an upgrade this year, with its ECR score rising more than three points as it recovered from the after-effects of the 2012 banking crisis. Only a week after ECR declared Cyprus almost as safe as Portugal, S&P uprated the sovereign one notch to BB-, followed by similar moves from Fitch and Moody’s in October and November respectively.

chart-ecr-cyprus

So what does 2016 hold in store? Several of Europe’s indebted sovereigns are improving in Euromoney’s survey, most notably Hungary, which is due for a return to investment grade after climbing six places this year into tier 3. "Hungary has been turned from a very vulnerable country to a very resilient one", says Gergely Tardos, ECR expert and head of research at OTP Bank.

chart-ecr-hungary

In contrast to Hungary, Saudi Arabia is struggling in the new low oil price era. It has considerable reserves, but with fiscal and external account indicators turning negative, and economic growth subdued, ECR is pointing to another downgrade for the sovereign.