BlackRock Investment InstItute

BlackRock soveReIGn RIsk InDeXsecond Quarter 2014

July 2014

[ 2 ] B l a c k R o c k s o v e R e I G n R I s k I n D e X

the opinions expressed are as of July 2014 and may change as subsequent conditions vary.

BlackRock Investment InstItutethe BlackRock Investment Institute leverages the firm’s expertise across asset classes, client groups and regions. the Institute’s goal is to produce information that makes Blackrock’s portfolio managers better investors and helps deliver positive investment results for clients.

executIve dIrectorlee Kempler

chIef strategIst ewen cameron Watt

executIve edItorJack reerink

Benjamin BrodskyGlobal Head of BlackRock Fixed Income Asset Allocation

sami mesrourMember of BlackRock Model-Based Fixed Income Team

ewen cameron WattChief Investment Strategist, BlackRock Investment Institute

Garth FlanneryMember of BlackRock Model-Based Fixed Income Team

sovereign risk update our latest update of the Blackrock sovereign risk Index (BsrI) details quarterly movers in our 50-country index and highlights argentina’s position. try our interactive BSRI to view individual country scores, compare two countries and sort rankings by index components.

our main headlines for the quarter ended June 30:

} revisions to the International Monetary fund (IMf)’s quarterly growth projections resulted in a reshuffling of rankings. Belgium, uk, Israel and netherlands benefited. spain rose due to an improvement in its net debt position.

} Brazil’s ranking dropped four notches due to a rise in the country’s short-term debt. Russia dropped three spots due to a decline in its perceived government effectiveness and a downward revision to its economic growth prospects.

} argentina’s BsrI score dipped as the IMf slashed the country’s long-term gdP forecasts. a history of defaults and political upheaval have been the country’s achilles’ heel—and have dragged argentina’s overall score lower as the country negotiates with holdout creditors who have rejected its debt restructuring.

drawing on a pool of financial data, surveys and political insights, the BsrI provides investors with a framework for tracking sovereign credit risk. the index uses more than 30 quantitative measures, complemented by qualitative insights from third-party sources.

the index breaks down the data into four main categories that each count toward a country’s final BsrI score and ranking: fiscal space (40%), Willingness to Pay (30%), external finance Position (20%) and financial sector health (10%).

} Fiscal space includes metrics such as debt to gross domestic product (gdP), the debt’s term structure, tax revenues and dependency ratios.

} Willingness to Pay measures a government’s perceived effectiveness and stability, and factors such as perceived corruption.

} external Finance Position includes exposure to foreign currency debt and the state of the current account balance.

} Financial sector Health gauges the banking system’s strength.

for full descriptions, see Introducing the BlackRock Sovereign Risk Index of June 2011. the BsrI’s inputs are updated at irregular intervals, meaning some changes may only reflect the timing of data releases. small changes in scores can spur big changes in rankings, as many issuers are bunched together in the index.

B s R I Q u a R t e R ly u P D at e [ 3 ]

Don’t cRy FoR meargentina BsRI Breakdown, 2011–2014

Source: BlackRock Investment Institute, July 2014.

FiscalSpace

Willingnessto Pay

ExternalFinance

FinancialSector

Overall

0

-0.5

-1

BS

RI S

CO

RE

Jun 14Jun 11 Jun 12 Jun 13

revisions to the IMf’s long-term gdP growth forecasts resulted in some large ranking shifts in the quarter. Belgium (up four notches in our 50-country index), uk (up three), Israel and netherlands (both up two) benefited from upward revisions to their gdP growth forecasts. spain had the biggest BsrI score gain (and its ranking rose four notches to 38th) due to an improved IMf assessment of its net debt position.

Brazil (down four to 31st) fell the most in the rankings (along with china). Brazil’s debt is becoming more front-loaded. short-term debt rose to 21% of gdP from 12% a quarter earlier, IMf data show. china fell four notches to 23rd on a modest decline in its BsrI score, which is bunched together with countries such as uK and Poland.

Russia dropped three spots due to a decline in its perceived Willingness to Pay and a downward revision to its growth prospects against a backdrop of rising tensions with ukraine.

argentina registered the biggest BsrI score decline (but dropped just one notch) as the IMf slashed the country’s long-term gdP growth forecasts.

a WoRlD oF soveReIGn RIskBsRI country Rankings by Quintile, June 2014

Source: BlackRock Investment Institute, July 2014.

click for interactive charts

this hurt argentina’s Fiscal Space score. see the chart below. Weak Willingness to Pay is the main drag on argentina’s overall score. argentina is seeking a deal with holdout creditors who have rejected its debt restructurings.

1 norway2 singapore3 switzerland4 sweden5 germany6 taiwan7 finland8 canada9 new Zealand

10 australia

top ten

11 netherlands12 denmark13 chile14 south Korea15 usa16 austria17 Malaysia18 czech republic19 Peru20 united Kingdom

11-20

21 Poland22 Israel23 china24 russia25 Philippines26 thailand27 Belgium28 colombia29 france30 slovakia

21-30

31 Brazil32 Mexico33 south africa34 Japan35 croatia36 Indonesia37 turkey38 spain39 India40 nigeria

31-40

41 Ireland42 hungary43 slovenia44 Italy45 argentina46 Portugal47 ukraine48 egypt49 venezuela50 greece

Bottom ten

not FDIc Insured • may lose value • no Bank Guarantee

This paper is part of a series prepared by the BlackRock Investment Institute and is not intended to be relied upon as a forecast, research or investment advice, and is not a recommendation, offer or solicitation to buy or sell any securities or to adopt any investment strategy. The opinions expressed are as of July 2014 and may change as subsequent conditions vary. The information and opinions contained in this paper are derived from proprietary and nonproprietary sources deemed by BlackRock to be reliable, are not necessarily all-inclusive and are not guaranteed as to accuracy. As such, no warranty of accuracy or reliability is given and no responsibility arising in any other way for errors and omissions (including responsibility to any person by reason of negligence) is accepted by BlackRock, its officers, employees or agents. This paper may contain “forward-looking” information that is not purely historical in nature. Such information may include, among other things, projections and forecasts. There is no guarantee that any forecasts made will come to pass. Reliance upon information in this paper is at the sole discretion of the reader.

In the EU issued by BlackRock Investment Management (UK) Limited (authorised and regulated by the Financial Conduct Authority). Registered office: 12 Throgmorton Avenue, London, EC2N 2DL. Registered in England No. 2020394. Tel: 020 7743 3000. For your protection, telephone calls are usually recorded. BlackRock is a trading name of BlackRock Investment Management (UK) Limited. Issued in Australia by BlackRock Investment Management (Australia) Limited ABN 13 006165975 AFSL 230523. This document contains general information only and does not take into account an individual’s financial circumstances. An assessment should be made as to whether the information is appropriate in individual circumstances and consideration should be given to talking to a financial or other professional adviser before making an investment decision. In New Zealand, this information is provided for registered financial service providers only. To the extent the provision of this information represents the provision of a financial adviser service, it is provided for wholesale and professional investors only. In Singapore, this is issued by BlackRock (Singapore) Limited (Co. registration no. 200010143N). In Hong Kong, this document is issued by BlackRock Asset Management North Asia Limited 貝萊德資產管理北亞有限公司 and has not been reviewed by the Securities and Futures Commission of Hong Kong. Not approved for distribution in Taiwan or Japan. In Canada, this material is intended for permitted clients only. In Latin America this piece is intended for use with Institutional and Professional Investors only. This material is solely for educational purposes and does not constitute investment advice, or an offer or a solicitation to sell or a solicitation of an offer to buy any shares of any funds (nor shall any such shares be offered or sold to any person) in any jurisdiction within Latin America in which such an offer, solicitation, purchase or sale would be unlawful under the securities laws of that jurisdiction. If any funds are mentioned or inferred to in this material, it is possible that some or all of the funds have not been registered with the securities regulator of Brazil, Chile, Colombia, Mexico, Peru or any other securities regulator in any Latin American country, and thus, might not be publicly offered within any such country. The securities regulators of such countries have not confirmed the accuracy of any information contained herein.

The information provided here is neither tax nor legal advice. Investors should speak to their tax professional for specific information regarding their tax situation. Investment involves risk. The two main risks related to fixed income investing are interest rate risk and credit risk. Typically, when interest rates rise, there is a corresponding decline in the market value of bonds. Credit risk refers to the possibility that the issuer of the bond will not be able to make principal and interest payments. International investing involves risks, including risks related to foreign currency, limited liquidity, less government regulation, and the possibility of substantial volatility due to adverse political, economic or other developments. These risks are often heightened for investments in emerging/developing markets or smaller capital markets.

FoR moRe InFoRmatIon: www.blackrock.com

©2014 BlackRock, Inc. All Rights Reserved. BLACKROCK, BLACKROCK SOLUTIONS, iSHARES, SO WHAT DO I DO WITH MY MONEY and INVESTING FOR A NEW WORLD are registered trademarks of BlackRock, Inc. or its subsidiaries in the United States and elsewhere. All other trademarks are those of their respective owners.

1118A-BII-0714 / BII-0006

Why Blackrock as the world’s largest investment manager, we believe it’s our responsibility to help investors of all sizes succeed in the new World of Investing. We were built to provide the global market insight, breadth of capabilities, unbiased investment advice and deep risk management expertise these times require.

the Resources You need for a new World of InvestingInvesting with Blackrock gives you access to every asset class, geography and investment style, as well as extensive market intelligence and risk analysis, to help build the dynamic, diverse portfolios these times require.

the Best thinking You need to uncover opportunityWith deep roots in all corners of the globe, our 100 investment teams in 30 countries share their best thinking to translate local insight into actionable ideas that strive to deliver better, more consistent returns over time.

the Risk management You need to Invest With clarityWith more than 1,000 risk professionals and premier risk management technology, Blackrock digs deep into the data to understand the risk that has to be managed for the returns our clients need and bring clarity to the most daunting financial situations.

BlackRock. Investing for a new World.®