Covid-19 Crisis Update: What happened to Sovereign Credit Quality in July?

Date: 4.8.2020 Number: 20-114a

This note presents an update of Risk Control’s analysis of the sovereign ratings and PDs implied by CDS spreads. Risk Control’s earlier analysis was contained in the note: “Real Time Sovereign Ratings in the Covid-19 Crisis,” 20-65a.[1] We focus on the question: What happened to Sovereign Credit Quality in July?

The key points of the update are: A. Overall, sovereign credit quality improved. B. There is no change in the 1-year PD implied ratings for 71% of the countries and 5-year PD implied ratings for 76% of the countries in our sample in July. C. The rest of the countries have higher ratings. D. Ratings for only 3 countries based on 1-year PDs (Greece, Slovakia, Uruguay) have deteriorated in July. Based on 5-yeard PDs, ratings of Greece and Hong Kong have deteriorated in July. Table 1 shows the rating changes in July 2020. Key findings are:

• Based on the 1-year implied historical PDs, the ratings of 47 countries remained unchanged in July, 16 countries increased and 3 countries decreased.

• Rating increase by 1 notch is for Brazil, Chile, China, Indonesia, Kazakhstan, Malaysia, Portugal, Saudi Arabia, South Korea, Spain, UK and Vietnam. . Rating increase by 2 notches is for Australia, Panama and Philippines. Rating increase by 3 notches is for Qatar.

• Countries for which ratings dropped are Greece, Slovakia and Uruguay.

• Based on the 5-year implied historical PDs, the ratings of 50 countries increased in July, 14 countries increased and 2 countries decreased. . Rating increase by 1-notch is for Australia, Colombia, Indonesia, Ireland, Japan, Malaysia, Panama, Peru, Portugal, Qatar, Saudi Arabia, Thailand, U.K. and Vietnam. Rating decrease by 1 notch is for Greece and Hong Kong.

1 This is available at: https://www.riskcontrollimited.com/wp-content/uploads/2020/05/Real-Time-Sovereign-Ratings-inthe-Covid-19-Crisis-20-65a-15-5-20-FINAL.pdf.

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Table 2 shows the comparison of regional average ratings as of 1/07/2020 and 31/07/2020. Based on 1-year PDs, the average rating has improved for Asia & Pacific and Middle East. Based on 5-year PDs, the average rating has improved for Asia & Pacific.

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