Full report available here.
In the Covid-19 crisis, the credit standing of sovereign borrowers has suddenly worsened as governments, facing difficult trade-offs between saving lives and the economy, have allowed their deficits to balloon.
The sovereign ratings published by ratings agencies and developed internally by financial institutions provide slow-moving perspectives on country credit quality. First, they are through-the-cycle rather than point-in-time in methodology and, second, they are determined through elaborate bureaucratic procedures that make the resulting credit evaluations far from timely in the middle of a rapidly evolving crisis. For investors and lenders, making the right decision in the crisis requires timely information about the fast-changing situation.
For these reasons, it is highly advisable to look at the information on credit quality implicit in market prices. Credit Default Swap (CDS) spreads provide a distillation of market views on the credit quality of issuers. However, these views are expressed in basis swap spreads rather than in an intuitive way related to standard credit quality grades.
Using a transparent methodology, this research report derives point-in-time or ‘real-time’ ratings and 1 and 5-year default probabilities from Credit Default Swap (CDS) spreads. From the ratings implied by 1-year probabilities, the average rating decline for Europe is 2.0 notches, for Middle East 3.1, for Asia & Pacific 2.6, for South & Latin America 2.9 and for Africa 4.3.
The crisis naturally affects credit quality over short periods more than long (as, ultimately, solutions to the medical emergency will surely be found). Hence, when ratings are benchmarked off 5-year CDS-spread implied Probabilities of Default (PDs), the average notch declines are smaller. Based on 5-year probabilities, the average rating drop for Europe is 1.3 notches, Middle East is 2.4, Asia & Pacific is 2.9, South & Latin America is 2.8 and Africa is 3.0
Within Europe, the highest rating drops are seen in Romania, Portugal, Russia, Greece, Hungary and Spain. In the Middle East, the largest drops are in Saudi Arabia, Qatar and Bahrain. In Asia & Pacific, Vietnam, Indonesia and Kazakhstan suffer the biggest drops. In South and Latin America, Panama, Colombia and Brazil have the largest rating drops.
Globally, the largest declines have been in Vietnam, Panama, Indonesia, Brazil, Russia, Colombia, Romania, Kazakhstan, Qatar, Saudi Arabia, Bahrain and Ivory Coast. These countries have experienced implied ratings declines ranging from 9 notches in the case of Vietnam to 6 notches for Ivory Coast.
The crisis is fast moving, noticeable improvements in PDs have been observed in the last three weeks. Risk Control is regularly updating its real-time ratings estimates and will make these available through updates of this note and a dedicated web application for coming months.