Sovereign Credit Ratings and Least Developed Countries

Transcription

1 Sovereign Credit Ratings and Least Developed Countries Olu Sonola & Charles Seville 9 December 2014, New York

2 What is a Credit Rating? How Is It Derived? Rating Definition Rating Definition A credit rating expresses a third-party opinion on the relative credit quality of debt typically issued in the form of bonds or loans. Fitch s ratings consist of letter grades (AAA to C) and either a Stable, Positive, or Negative Outlook (or more rarely a Positive or Negative Watch), which signals a potential future ratings change. Sovereign Rating Process Sovereign analysts gather economic data, assess economic policies and prospects, political situation, make economic forecasts, compare with similar countries. Analysts talk to policymakers in the country e.g. Ministry of Finance, Central Bank - and private sector Sovereign Ratings Process Fitch s sovereign group relies on a data-driven sovereign rating model. Analysts overlay model results with qualitative judgements. Source: Fitch Finally, a committee of analysts decides the ratings and publishes the press release/report. 1

3 The Rating Scale Source: Fitch 2

4 Impact of a Credit Rating Fitch Study: Credit Rating Spurs FDI Sovereign Ratings and Foreign Investment Fitch study (2012) found that those countries in sub-saharan Africa which had sovereign credit ratings attracted more foreign direct investment - even when controlling for other variables that explain foreign investment. Ratings Inform Investors, Discipline Policymakers Benefits of a Sovereign Rating Signalling effect: make investors aware that the country is open to foreign capital Information effect: permit differentiation between countries Sovereign/country risk identification: investors may see the sovereign rating as an indication of country risk. Economic policy effect: scrutiny by a credit rating agency (and bondholders) may contribute to improving the quality of economic policy Source: Fitch 3

5 How to Judge Sovereign Creditworthiness? Data and Judgements That Inform Fitch s Sovereign Ratings Structural Factors: Per capita income, political risk, banking system soundness, debt service record Public Finances: Government debt burden, maturity schedule, budget balance, sovereign s balance sheet. Financing flexibility ability to cope with fiscal shocks Decomposing the Ratings Weights Structural factors 47% in Sovereign Rating Model Public finances, 26% Macroeconomic performance and prospects: Growth prospects, exposure to shocks, credibility and consistency of economic policies External finances: Balance of payments, reserves, government s sources of hard currency Macro, 10% External finances, 17% Source: Fitch 4

6 Sovereign Rating Trends and LDC Ratings Sovereign Ratings By Region Ratings of UN Least Developed Countries AA+ AA Developed Markets EM - MEA EM - SSA EM - Asia EM - LatAm AA+ AA Fitch Rates 8 of 48 LDCs Ratings of Least Developed Countries AA- A+ AA- A+ Angola BB- Uganda B A A- A A- Bangladesh BB- Zambia B BBB+ BBB BBB- BB+ BB BB- Africa (incl. S. Africa) in blue BBB+ BBB BBB- BB+ BB BB- Ethiopia B Rwanda B+ Lesotho BB- Mozambique B B+ B+ DM = Developed Markets, EM = Emerging Markets. Source: Fitch 5

7 Sub-Saharan Africa: Growing Stock of Eurobonds and Syndicated Loans More Sub-Saharan African Sovereigns Have Become Eurobond Issuers (USDbn) 25 Seychelles Gabon Republic of Congo Ghana Senegal Cote d'ivoire Nigeria Tanzania Namibia Zambia Angola Rwanda Mozambique Kenya Ethiopia Source: Fitch 6

8 Sub-Saharan Africa: FDI Inflows Sub-Saharan African Sovereigns Are Attracting More Foreign Investment, Led By Resource-Rich Countries (USDbn) USDbn (left scale) % of GDP (right scale) (% of GDP) DM = Developed Markets, EM = Emerging Markets. Source: Fitch 7

9 People in pursuit of answers 4/3/14 8

10 Disclaimer Fitch Ratings credit ratings rely on factual information received from issuers and other sources. Fitch Ratings cannot ensure that all such information will be accurate and complete. Further, ratings are inherently forward-looking, embody assumptions and predictions that by their nature cannot be verified as facts, and can be affected by future events or conditions that were not anticipated at the time a rating was issued or affirmed. The information in this presentation is provided as is without any representation or warranty. A Fitch Ratings credit rating is an opinion as to the creditworthiness of a security and does not address the risk of loss due to risks other than credit risk, unless such risk is specifically mentioned. A Fitch Ratings report is not a substitute for information provided to investors by the issuer and its agents in connection with a sale of securities. Ratings may be changed or withdrawn at any time for any reason in the sole discretion of Fitch Ratings. The agency does not provide investment advice of any sort. Ratings are not a recommendation to buy, sell, or hold any security. ALL FITCH CREDIT RATINGS ARE SUBJECT TO CERTAIN LIMITATIONS AND DISCLAIMERS. PLEASE READ THESE LIMITATIONS AND DISCLAIMERS AND THE TERMS OF USE OF SUCH RATINGS AT 4/3/14 9

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