ECR: In search of the next investment-grade sovereign
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Euromoney Country Risk

ECR: In search of the next investment-grade sovereign

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.

Three other possibilities are Sri Lanka, Mongolia and Nigeria. It might be too early to consider such investments as anything other than speculative, with their scores still weighed down by medium-to-high risks for many aspects of their risk profiles. However, all three have made solid enough progress through the rankings in recent years to keep an eye on.

Sri Lanka, 73rd on the back of a five-point improvement since 2010, is higher than Morocco, Kazakhstan and Azerbaijan in the table, all of which are investment grade.

French downgrade predicted; more to follow in Europe

The Philippines example is not the only ratings action to have been predicted by ECR, as Europe’s travails illustrate.

Downward score trends since 2008 for many rock-solid triple-A sovereigns have often preceded ratings actions, culminating in several triple-A rated EU member states being placed on review for a downgrade – or, as with France and the UK, to have ultimately lost that status from one or more of the rating agencies, though usually with a considerable lag involved.


S&P’s decision to further downgrade France from AA+ to AA this November was anticipated by ECR experts in the light of its downward score trend, and it might well lead Fitch and Moody’s to follow suit, highlighting the delayed-reaction function often demonstrated by the agencies’ behaviour, which has long raised doubts over the methods used.

France was one of 10 eurozone sovereigns downgraded by ECR experts during the third quarter, with 12 of its 15 political, economic and structural risk indicators scoring less than a year ago.

However, this is part of a longer-term trend deterioration that has seen its total risk score drop more than 12 points since 2010 and its ranking to 21st, two places below the UK, rated Aaa by Moody’s and one notch lower by Fitch and S&P.

The justification for the S&P ratings action, based on high unemployment weakening the fiscal and structural reform effort, was rather modest in the opinion of a research note by Nykredit, albeit reflected in ECR’s indicators showing the largest year-on-year falls for unemployment/employment and government finances.

A deeper analysis would suggest it also reflects the continual failure of François Hollande’s Socialist Party government to meet its 3% EU deficit target, amid inadequate pension and other structural reform efforts relying on tax increases rather than genuine spending cuts, which highlight the political conflict involved in the eurozone’s debt resolution.

This has translated into lower political risk sub-factor scores for France, notably to the regulatory and policy environment compared with a year ago.

The model-based approach of the ECR survey condenses a variety of information to resolve what can often be conflicting opinions among the raters, leading to confusingly different ratings, as is now the case with many European sovereigns.

Note from the table (above) the conflicting ratings for Malta, Portugal and Cyprus, and the fact that where the ratings do coincide, the differences in opinion regarding their suitability for an upgrade or downgrade. Malta and Portugal have stabilized according to ECR, whereas Cyprus has continued its long-term slide.

Chile and Taiwan ripe for an upgrade

However, the discrepancies go beyond Europe. A closer inspection of the survey data indicate that – on the back of the long-term advancement in their scores (eight points and almost five, respectively, since 2010) – Chile and Taiwan, now ranking 15th and 16th after a one-place rise during the third quarter, are closing in on tier-one status, now tantalizingly one place above.


Rated A+ by Fitch and in the lowest double-A category according to Moody’s and S&P, both sovereigns are worthy of an upgrade according to ECR experts’ risk evaluations, notably when compared to the US, Qatar, the UK, Belgium and France – all sequentially lower on ECR’s global scoreboard, but considered more creditworthy, the agencies would suggest.

Not so according to Euromoney’s survey, which reveals that Chile, just 3.3 points off a tier-one ranking, has a higher economic assessment score than any of those five countries with the exception of Qatar, which is not surprising given its huge oil and gas wealth keeps the budget in surplus and growth ticking along nicely.

Chile’s strong growth and budget close to balance are predicted to continue according to most forecasters.

Plus, where political risk is concerned, Chile’s democratic underpinnings, strong institutions and inherent stability – with few dangers anticipated from the forthcoming presidential poll – give it a higher score, almost on a par with the US. In fact, for its regulatory and policy environment and government stability, Chile scores higher than the US.

Taiwan’s political risks, meanwhile, are more acute than Chile’s. However, it, too, scores highly for its economics in view of similarly solid growth prospects – with real GDP growth accelerating from 2.2% this year to 3.8% in 2014 according to the IMF’s latest assessment – and a smaller fiscal black hole compared with Belgium, France, the UK or US, at around 2.5% of GDP.

Other positive features include a huge current-account surplus supporting the new Taiwan dollar’s pegged exchange rate.

In fact, as the chart (below) demonstrates, Chile and Taiwan’s improving trends began toward the end of last year, contrasting with the universal trend deterioration in G10 scores led by Italy and France which have continued since 2010 and are rooted in the 2007/08 global crisis debacle.

More than 400 economists and other experts from a range of financial and other institutions take part in Euromoney’s Country Risk Survey. They evaluate the risks faced by international investors in more than 180 markets, scoring countries across a range of political, economic and structural criteria. Access to the latest country rankings is available via a subscription to

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