Assessing sovereign risk in Frontier Markets - BBH

Analysts at BBH have produced the following ratings model to assess relative sovereign risk in Frontier Markets. 

Key Quotes:

A country’s score directly reflects its creditworthiness and underlying ability to service its external debt obligations.  Each score is determined by a weighted compilation of fifteen economic and political indicators, which include external debt/GDP, short-term debt/reserves, import cover, current account/GDP, GDP growth, and budget balance.  

These scores translate into a BBH implied rating that is meant to reflect the accepted rating methodology used by the major agencies.  We find that our model is very useful in predicting rating changes by the major agencies.  The total number of Frontier Markets covered by our model is currently 39. 

There have been 17 rating actions since our last update in November.  There were 11 positive actions and 6 negative, continuing the improving trend last year.  For all of 2017, the actions were 29 positive and 33 negative, which represents a 53% share for the negatives.  This is an improvement over 2016, where 60 actions out of the 73 total (82%) were negative.  

The deterioration in credit quality of the Frontier Markets in recent years largely reflects the negative impact from slower global growth and low commodity prices.  Given that this trend appears to be reversing, we look for further improvement in Frontier ratings as we move through 2018.  Of course, there will be divergences within Frontier Markets, just as we have seen divergences in the Emerging Markets.

Since our last update, Fitch has been the most negative with four moves.  Fitch downgraded Namibia from BBB- to BB+ with stable outlook and Oman from BBB to BBB- with negative outlook.  It also moved the outlook on Costa Rica’s BB rating and Pakistan’s B rating from stable to negative.  

On the flip side, Fitch provided five positive moves.  It upgraded Bulgaria from BBB- to BBB, Serbia from BB- to BB, and Croatia from BB to BB+, all with stable outlook.  Fitch also moved the outlooks on Argentina’s B rating and Mongolia’s B- rating from stable to positive.

Moody’s downgraded Nigeria from B1 to B2 with stable outlook.  On the other hand, it upgraded Argentina from B3 to B2 and Mongolia from Caa1 to B3, both with stable outlooks. Elsewhere, S&P downgraded Jordan from BB- to B+ and Angola from B to B-, both with stable outlooks.  

S&P also leaned more positive, just like the other two agencies.  The two negative moves saw Oman downgraded from BB+ to BB and Bahrain from BB- to B+, both with stable outlooks.  On the flip side, S&P had twice as many positive moves.  It upgraded Bulgaria from BB+ to BBB- and Serbia from BB- to BB, with stable outlooks.  S&P also moved the outlook on Sri Lanka’s rating from negative to stable and on El Salvador’s rating from stable to positive. "