Sovereign Ratings Methodology: Latin America and the Caribbean · Global Corporate and Governments...
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Permission to reprint or distribute any content from this presentation requires the prior written approval of Standard & Poor’s. Copyright (c) 2008 Standard & Poor’s, a division of The McGraw-Hill Companies, Inc. All rights reserved. Sovereign Ratings Methodology: Latin America and the Caribbean Lisa M. Schineller Director Sovereign Ratings, Economist Latin America Standard & Poor’s April 30, 2010
Transcript of Sovereign Ratings Methodology: Latin America and the Caribbean · Global Corporate and Governments...
Permission to reprint or distribute any content from this presentation requires the prior written approval of Standard & Poor’s.Copyright (c) 2008 Standard & Poor’s, a division of The McGraw-Hill Companies, Inc. All rights reserved.
Sovereign Ratings Methodology: Latin America and the Caribbean
Lisa M. SchinellerDirector Sovereign Ratings, Economist Latin AmericaStandard & Poor’s
April 30, 2010
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Working Group in the UN’s General Assembly
On the World Economic and Financial Crisis
United NationsNew York
April 30, 2010
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Agenda
• Rating and Risk Assessment Concepts
• Sovereign Ratings and Country Risk
• Non-Sovereign Ratings and Country Risk
• T&C Assessments
• Rating Process
• Sovereign Ratings Methodology
• Sovereign Ratings Trends Latin America and the Caribbean
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Concepts: Standard & Poor’s Rates Sovereigns, Not Countries
• Standard & Poor’s rates sovereign governments and other public and private sector entities which can issue debt; it doesnot rate countries.
• For example, Standard & Poor’s rates the United Mexican States, the Socialist Republic of Vietnam, and the Federal Republic of Germany, but not Mexico, Vietnam, or Germany.
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Concepts: What A Sovereign Rating Is And Is Not
A Standard & Poor’s sovereign rating is:
• A current opinion of the creditworthiness of a sovereign government, where creditworthiness pertains largely to the timely service of debt.
• A globally comparable, independent, objective, forward-looking opinion.
• A reflection of medium-term fundamentals -- through economic and political cycles.
A Standard & Poor’s sovereign rating is not:
• A country risk rating or country investment ranking.
• A recommendation to buy, sell or hold a security, or a prediction of the stability or volatility of a security’s price.
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Concepts: Willingness-To-Pay
• Importance of willingness-to-pay component distinguishes sovereigns from many other types of issuers.
• Creditors have only limited legal redress against sovereigns.
• Judgments against sovereigns are difficult or impossible to enforce.
• Sovereigns can (and do) change their laws and amend their constitutions.
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Country Risk
Country risk affects non-sovereign ratings and is the aggregate of the specific risks involved in doing business within or from a particular country. Country risk includes a broad range of political, legal, economic, and industry factors including:
• Transparency and reliability of institutions
• Openness of political processes
• Rule of law and judicial independence
• Corruption
• Infrastructure
• Economic prospects
• Labor market flexibility
• Exchange rate, inflation, and interest rate volatility
• Financial and capital market sophistication
• Regulatory effectiveness/burden
• Accounting standards and practices
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Sovereign Ratings Vs. Country Risk
How are sovereign ratings and country risk related? • Standard & Poor’s treats these concepts as highly correlated in that
sovereigns with the highest ratings (lowest sovereign risk) tend to be in countries with the least country risk, as evidenced by stable political systems, well-developed legal frameworks, and open, market-oriented economies.
• But, across the rating scale, there is sometimes a good deal of variation on individual factors. For example, a sovereign with a low rating might have a fairly flexible labor market or favorable regulatory structures.
• Many country risk factors are directly or indirectly related to government policies.
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Non-sovereign Ratings and Country Risk
Does Standard & Poor’s have “sovereign ceilings”?
• The “sovereign ceiling” concept.
• There are no sovereign rating ceilings at Standard & Poor’s.
• Each rated entity is analysed in the context of the country risk, or business and operating environment, of the country of domicile.
• Some industries are more affected by country risk than others.
• Banks and regulated utilities are examples of industries most exposed; export-oriented companies typically are least exposed.
• Standard & Poor’s rates entities higher than the sovereign if: 1) they have good fundamental credit characteristics; 2) are sheltered from country risk factors, or adaptable in the face of shocks; and 3) are likely to keep servicing debt if the government defaults.
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Transfer & Convertibility Assessments• One of the country risks non-sovereigns may face is that in a period of
stress the sovereign or the central bank will restrict access to foreign exchange needed for debt service.
• More than tax increases and many other forms of country risk, such restrictions may be difficult to manage and may be likely to cause private sector defaults.
• Standard & Poor’s has established country-specific T&C assessments that evaluate such risks.
• In the past decade, there has been widespread easing of foreign exchange controls and infrequent use of restrictions on access to foreign exchange needed for debt service.
• In most countries, the T&C assessment exceeds the sovereign foreign currency rating, reflecting the lesser probability of restrictions on private sector access to foreign exchange than of sovereign default.
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Rating Process: Global Focus
Global Corporate and GovernmentsRatings Practices
Global Economic and Fixed Income Research
• Dubai, United Arab Emirates
• Frankfurt, Germany
• Johannesburg, South Africa
• London, England
• Madrid, Spain
• Milan, Italy
• Moscow, Russia
• Paris, France
• Stockholm, Sweden
• Tel Aviv, Israel**
• Beijing, China
• Hong Kong, China
• Jakarta, Indonesia**
• Kuala Lumpur, Malaysia
• Melbourne, Australia
• CRISIL* Mumbai,and throughout India
• Buenos Aires, Argentina
• Santiago, Chile**
• São Paulo, Brazil
• Seoul, Korea
• Singapore
• Sydney, Australia
• Taipei*, ROC
• Tokyo, Japan
North America
• Boston, MA, USA
• Chicago, IL, USA
• Dallas, TX, USA
• New York, NY, USA
• San Francisco, CA, USA
• Washington, DC, USA
• Toronto, ONT, Canada
• Mexico City, Mexico
Global Structured FinanceRatings Practices
Global Policy and Quality Functions
Latin AmericaEurope, Middle East
and AfricaAsia / Pacific
* Indicates majority ownership by Standard & Poor’s. ** Indicates affiliate.
Standard & Poor’s is a global credit ratings and research organizationwith considerable regional presence.
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Aspects of the Rating Process: From The Request To The Rating
PreparesDocuments
ManagementMeeting
CommitteeDecidesRating
Assigns Analytical Team;
Conducts Research
Publishes Rating
Surveillance
Rating Communicated To Issuer
RequestsRating
Standard & Poor’s
Issuer
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Rating Process: Surveillance
Surveillance• Looks through political and economic cycles.
• Anticipates policy response.
• Reviews each sovereign at least annually.
• Maintains regular contact by telephone and e-mail.
• Calls a rating committee whenever fundamentals seem to be changing.
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Distribution of Sovereign Ratings
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Sovereign Ratings: Latin America & Caribbean (April 2010)
• Chile A+/AA• Trinidad & Tobago A/A+• Aruba A-/A-• Bahamas BBB+• Barbados BBB/BBB+• Mexico BBB/A• Montserrat BBB-• Brazil BBB-/BBB+• Peru BBB-/BBB+
• Panama BB+• Colombia BB+/BBB+ • El Salvador BB
• Costa Rica BB/BB+• Guatemala BB/BB+• Uruguay BB-• Venezuela BB-• Honduras B• Suriname B+/BB-• Dominican Republic B• Belize B• Paraguay B• Argentina B-• Bolivia B-• Grenada B-• Jamaica B-• Ecuador CCC+
Rating: Foreign Currency / Local currencyOutlook: Stable, Positive, Negative
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Rating Methodology Profile
• Political Risk
• Income and Economic Structure
• Economic Growth Prospects
• Fiscal Flexibility
• General Government Debt Burden
• Off-Budget and Contingent Liabilities
• Monetary Stability
• External Liquidity
• External Debt Burden
Sovereign Credit Risk Factors:
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• Stability and Legitimacy of Political Institutions
• Popular Participation
• Process of Succession
• Transparency
• Geopolitical Factors
Political Risk
Political Risk
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Economic Structure
GDP Per Capita 2010 Forecast
-
5,000
10,000
15,000
20,000
25,000
Chile Mexico Brazil Peru Median A Median BBB
(US$
)
Average 2005-20092010f
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Economic Structure
GDP Per Capita 2010 Forecast
0
5,000
10,000
15,000
20,000
25,000
30,000
Trinidadand Tobago
Aruba Baham as Barbados Median A M edian BBB
(US$
)
Average 2005-20092010f
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Economic Structure
GDP Per Capita 2010 Forecast
-
2,000
4,000
6,000
8,000
10,000
12,000
14,000
Panam a Colom bia Uruguay Venezuela Median BB
(US$
)
Average 2005-20092010f
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Economic Structure
GDP Per Capita 2010 Forecast
-
1,000
2,000
3,000
4,000
5,000
6,000
7,000
Dom inicanRepublic
Belize Grenada Jam aica Median B
(US$
)
Average 2005-20092010f
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Economic Structure
GDP Per Capita 2010 Forecast
-1,0002,0003,0004,0005,0006,0007,0008,0009,000
10,000
Argentina Bolivia Ecuador M edian B
(US$
)
Average 2005-20092010f
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Economic Growth
Grow th of Real GDP per Capita2010 Forecast
-
1.0
2.0
3.0
4.0
5.0
6.0
Chile Mexico Brazil Peru Median A Median BBB
(% C
hang
e)
Average 2005-20092010f
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Economic Growth
Grow th of Real GDP per Capita2010 Forecast
(3.0)(2.0)(1.0)-1.02.03.04.05.06.0
Trinidadand Tobago
Aruba Baham as Barbados Median A M edian BBB
(% C
hang
e)
Average 2005-20092010f
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Economic Growth
Grow th of Real GDP per Capita2010 Forecast
(3.0)(2.0)(1.0)-1.02.03.04.05.06.07.0
Panam a Colom bia Uruguay Venezuela Median BB
(% C
hang
e)
Average 2005-20092010f
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Economic Growth
Grow th of Real GDP per Capita 2010 Forecast
(3.0)(2.0)(1.0)-1.02.03.04.05.06.07.0
Dom inicanRepublic
Belize Grenada Jam aica Median B
(% C
hang
e)
Average 2005-20092010f
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Economic Growth
Grow th of Real GDP per Capita2010 Forecast
-
1.0
2.0
3.0
4.0
5.0
6.0
7.0
Argentina Bolivia Ecuador Median B
(% C
hang
e)
Average 2005-20092010f
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Fiscal Balances
General Governm ent Balance/GDP2010 Forecast
(5.0)(4.0)(3.0)(2.0)(1.0)-1.02.03.04.05.0
Chile M exico Brazil Peru Median A Median BBB
(%)
Average 2005-20092010f
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Fiscal Balances
General Governm ent Balance /GDP2010 Forecast
(5.0)(4.0)(3.0)(2.0)(1.0)-1.02.03.04.0
Trinidadand Tobago
Aruba Baham as Barbados M edian A Median BBB
(%)
Average 2005-20092010f
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Fiscal Balances
General Governm ent Balance /GDP2010 Forecast
(4.0)(3.5)(3.0)(2.5)(2.0)(1.5)(1.0)(0.5)-0.51.0
Panam a Colom bia Uruguay Venezuela Median BB
(%)
Average 2005-20092010f
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Fiscal Balances
General Governm ent Balance /GDP2010 Forecast
(10.0)(9.0)(8.0)(7.0)(6.0)(5.0)(4.0)(3.0)(2.0)(1.0)-
Dom inicanRepublic
Belize Grenada Jam aica Median B
(%)
Average 2005-20092010f
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Fiscal Balances
General Governm ent Balance/GDP2010 Forecast
(5.0)
(4.0)
(3.0)
(2.0)
(1.0)
-
1.0
Argentina Bolivia Ecuador Median B
(%)
Average 2005-20092010f
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Fiscal Debt Burden
Net General Governm ent Debt/GDP2010 Forecast
-5.0
10.015.020.025.030.035.040.045.050.0
Chile Mexico Brazil Peru Median A Median BBB
(%)
Average 2005-20092010f
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Fiscal Debt Burden
Net General Governm ent Debt/GDP2010 Forecast
-
10.0
20.0
30.0
40.0
50.0
60.0
70.0
Trinidad andTobago
Aruba Baham as Barbados Median A M edian BBB
(%)
Average 2005-20092010f
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Fiscal Debt Burden
Net General Governm ent Debt/GDP2010 Forecast
-
10.0
20.0
30.0
40.0
50.0
60.0
Panam a Colom bia Uruguay Venezuela Median BB
(%)
Average 2005-20092010f
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Fiscal Debt Burden
Net General Governm ent Debt/GDP2010 Forecast
-
20.0
40.0
60.0
80.0
100.0
120.0
140.0
Dom inicanRepublic
Belize Grenada Jam aica Median B
(%)
Average 2005-20092010f
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Fiscal Debt Burden
Net General Governm ent Debt/GDP2010 Forecast
-
10.0
20.0
30.0
40.0
50.0
60.0
70.0
Argentina Bolivia Ecuador Median B
(%)
Average 2005-20092010f
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Banking System Contingent Liabilities
Banking System Contingent Liability for Selected Sovereigns
*GPA: Gross Problematic Assets
14%48%15-30%Brazil
15%31%35-50%Jamaica6%12%35-50%Argentina
30%90%15-30%Panama
5%18%15-30%Mexico19%95%10-20%Bahamas 16%85%10-20%Chile
Contingent Liability/GDP
(2010)
Domestic Credit/GDP
(2010)GPA* RangeSovereign
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Monetary Performance
Inflation2010 Forecast
-
1.0
2.0
3.0
4.0
5.0
6.0
Chile Mexico Brazil Peru Median A Median BBB
(CPI
Ann
ual %
Cha
nge)
Average 2005-20092010f
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Monetary Performance
Inflation2010 Forecast
-1.02.03.04.05.06.07.08.09.0
Trinidad andTobago
Aruba Baham as Barbados Median A M edian BBB
(CPI
Ann
ual %
Cha
nge)
Average 2005-20092010f
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Monetary Performance
Inflation2010 Forecast
-
10.0
20.0
30.0
40.0
Panam a Colom bia Uruguay Venezuela Median BB(CPI
Ann
ual %
Cha
nge)
Average 2005-20092010f
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Monetary Performance
Inflation2010 Forecast
-2.04.06.08.0
10.012.014.016.0
Dom inicanRepublic
Belize Grenada Jam aica Median B
(CPI
Ann
ual %
Cha
nge)
Average 2005-20092010f
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Monetary Performance
Inflation2010 Forecast
-
5.0
10.0
15.0
20.0
25.0
30.0
Argentina Bolivia Ecuador Median B
(CPI
Ann
ual %
Cha
nge)
Average 2005-20092010f
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*CAR=Current Account Receipts.
Net External Debt/CAR*2010 Forecast
(20.0)(15.0)(10.0)
(5.0)-5.0
10.015.020.025.030.035.0
Chile Mexico Brazil Peru Median A Median BBB
(%)
Average 2005-20092010f
External Debt Burden
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Net External Debt/CAR*2010 Forecast
(70.0)(60.0)(50.0)(40.0)(30.0)(20.0)(10.0)
-10.020.030.040.0
Trinidadand Tobago
Aruba Baham as Barbados Median A M edian BBB
(%)
Average 2005-20092010f
*CAR=Current Account Receipts.
External Debt Burden
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Net External Debt/CAR*2010 Forecast
-
50.0
100.0
150.0
200.0
250.0
Panam a Colom bia Uruguay Venezuela Median BB
(%)
Average 2005-20092010f
*CAR=Current Account Receipts.
External Debt Burden
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Net External Debt/CAR*2010 Forecast
-20.040.060.080.0
100.0120.0140.0160.0180.0200.0
Dom inicanRepublic
Belize Grenada Jam aica Median B
(%)
Average 2005-20092010f
*CAR=Current Account Receipts.
External Debt Burden
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Net External Debt/CAR*2010 Forecast
(100.0)(80.0)(60.0)(40.0)(20.0)
-20.040.060.080.0
100.0120.0
Argentina Bolivia Ecuador Median B
(%)
Average 2005-20092010f
*CAR=Current Account Receipts.
External Debt Burden
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External Liquidity
Gross External Financing Requirem ents /Current Account Receipts and Usable Reserves
2010 Forecast
-
20
40
60
80
100
120
140
Chile Mexico Brazil Peru Median A Median BBB
(%)
Average 2005-20092010f
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Gross External Financing Requirem ents /Current Account Rece ipts and Usable Reserves
2010 Forecast
-20406080
100120140160180
Trinidad andTobago
Aruba Baham as Barbados Median A M edian BBB
(%)
Average 2005-20092010f
External Liquidity
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Gross External Financing Requirem ents /Current Account Rece ipts and Usable Reserves
2010 Forecast
-
50
100
150
200
250
300
350
Panam a Colom bia Uruguay Venezuela Median BB
(%)
Average 2005-20092010f
External Liquidity
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Gross External Financing Requirem ents /Current Account Receipts and Usable Reserves
2010 Forecast
-50
100150200250300350
Dom inicanRepublic
Belize Grenada Jam aica Median B
(%)
Average 2005-20092010f
External Liquidity
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Gross External Financing Requirem ents /Current Account Receipts and Usable Reserves
2010 Forecast
-
20
40
60
80
100
120
140
Argentina Bolivia Ecuador Median B
(%)
Average 2005-20092010f
External Liquidity
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Analytic services and products provided by Standard & Poor’s are the result of separate activities designed to preserve the independence and objectivity of each analytic process. Standard & Poor’s has established policies and procedures to maintain the confidentiality of non-public information received during each analytic process.
