Fitch: Global Sovereign Rating Changes From Criteria Update

LONDON, Capital Markets in Africa: Fitch Ratings published on Friday 22 July a review of its entire sovereign rating portfolio, incorporating changes to ratings derived from the application of its revised Sovereign Rating Criteria (dated 18 July 2016). The review focused on the notching relationship between sovereign Long-Term Local Currency (LTLC) and Long-Term Foreign Currency (LTFC) Issuer Default Ratings (IDRs), a review of existing Short-Term Foreign Currency (STFC) IDRs and the assignment of new Short-Term Local Currency (STLC) IDRs. In an approved variation from criteria, the review did not include LTFC IDRs. The rating actions that were taken as a result of the review for Fitch’s entire global sovereign rating portfolio are detailed in the a spreadsheet.

Fitch downgraded 23 LTLC IDRs, upgraded eight STFC IDRs and downgraded one STFC IDR. We affirmed all other LTLC IDRs and STFC IDRs. The issue ratings on Long-Term senior unsecured Local Currency (LC) bonds were affirmed or downgraded based on corresponding IDR rating actions. The issue ratings on Short-Term Foreign Currency (FC) bonds were affirmed based on corresponding IDR rating actions.

Fitch’s revised Sovereign Criteria cites two key factors that may support an upward notching of the LTLC relative to the LTFC IDR. These factors are: (i) strong public finance fundamentals relative to external finance fundamentals; and (ii) previous preferential treatment, if any, of LC creditors relative to FC creditors. This revised guidance on notching reflects Fitch’s assessment that credit risk profiles of sovereigns in LC and FC debt are typically aligned, a view that is partly informed by recent empirical evidence of sovereign defaults.

In reviewing the global portfolio, Fitch determined that neither of the key factors was supportive of notching the LTLC ratings of 23 sovereigns that previously had notching uplifts. As a result, we downgraded the LTLC IDRs of these 23 sovereigns. Chile (LTLC IDR AA-), New Zealand (LTLC IDR AA+) and Peru (LTLC IDR A-) are now the only sovereigns with LTLC ratings notched up from their LTFC ratings, all by one notch.

Fitch’s revised Sovereign Criteria also introduced new guidelines to ‘mapping’ from the Long-Term (LT) rating scale to the Short-Term (ST) rating scale, where an option of ST ratings exists. Specifically, Fitch’s published LT/ST rating correspondence table allows options at ‘A+’ (‘F1’ or ‘F1+’), ‘A-‘ (‘F2’ or ‘F1’) and ‘BBB’ (‘F3’ or ‘F2’). For STFC IDRs, Fitch will choose the higher of the two options if the sovereign has a Reserve Currency Flexibility (RCF) score of greater than zero, or an International Liquidity Ratio (ILR) of greater than 100%. For STLC IDRs, Fitch will always choose the higher of the two options.

The RCF score is based on the share of currencies in global official foreign exchange reserves, as reported by the International Monetary Fund, and currently includes the US dollar, euro, Japanese yen, British pound, Canadian dollar, Australian dollar and Swiss franc. The ILR ratio is calculated by Fitch to express a country’s liquid external assets as a percentage of its liquid external liabilities.

In reviewing the global portfolio, Fitch upgraded eight and downgraded one sovereign STFC IDRs where an option of STFC ratings based on RCF scores or ILRs existed.