Wednesday, January 11, 2017 5:04 PM / S&P Global Ratings
• The average sovereign rating fell by about one notch between year-end 2016 and late 2008 to between 'BBB' and 'BBB-'.
• As of year-end 2016, downgrades outnumbered upgrades by almost 3:1.
• The 30 negative outlooks as of year-end 2016 outnumbered seven positive outlooks, a ratio of approximately 4:1.
• Latin America accounts for the largest negative outlook bias globally (-10), together with the Middle East, Africa, and CIS (-10). Europe has a positive outlook balance of 1, the first positive number in a decade.
Global sovereign creditworthiness has declined slightly since the onset of the global financial crisis in 2008. The average long-term sovereign credit rating has fallen by just over one notch to between 'BBB-' and 'BBB', compared with just below 'BBB+' in mid-2008.
The average rating as weighted by the GDP of a country has also trended downward, currently standing at 'A+', one notch below the 'AA-' peak during 2008-2011. Negative outlooks outnumber positive outlooks, and the outlook balance (positive minus negative outlooks) has tilted negative, to -23 for year-end 2016 from -17 at year-end 2015. (Watch the related CreditMatters TV segments titled "The Global Sovereign Ratings Outlook 2017," and "Der Ausblick für Staatenratings 2017 in zwei Minuten," dated Jan. 10, 2017.)
On Dec. 31, 2016, the cut-off date for this report, S&P Global Ratings rated 130 sovereigns globally. Sovereign securities remain the most important asset class globally in terms of borrowing (see "Global Sovereign Debt Report 2016: Borrowing To Drop By 2% To US$6.7 Trillion," published on Feb. 29, 2016, on RatingsDirect).
All ratings referred to in this report are long-term foreign currency ratings. For an updated list of all sovereign ratings assigned by S&P Global Ratings, see our monthly updated "Sovereign Ratings List," last published on Jan. 6, 2017. For historical information on these ratings and assessments, please see our monthly updated "Sovereign Ratings History," last published on Jan. 6, 2017.
Just below 52% of all rated sovereigns are investment grade ('BBB-' or above). This ratio remains at the lowest level it has ever been (see chart 1). This negative trend is due not only to new sovereign ratings, that tend to be more likely in lower rating categories, but also to some "fallen angels," or downgraded sovereigns from investment-grade to speculative-grade, such as Azerbaijan, Bahamas or Bahrain, during 2016.
Throughout the past decade, sovereigns rated in the 'B' category have made up the single-largest cohort, currently 37, up from 33 five years ago.
At the other end of the spectrum, the number of 'AAA' rated sovereigns has now declined to 12, from an all-time high of 19 in December 2010, mostly due to downgrades in the eurozone, but also as a result of our lowering the long-term rating on the U.S. to 'AA+' in August 2011 and on the U.K. to 'AA' in June 2016 following the Brexit referendum. The share of 'AAA' ratings in the total universe of rated sovereigns has gradually dropped during that period to 9% from over 16% before the global financial crisis.
Currently, the 'AAA' rating on Australia carries a negative outlook, while no 'AA+' or 'AA' rated sovereign has a positive outlook. This could indicate that over the longer term the fall in the share of 'AAA' rated sovereigns could continue (see "Australia Outlook Revised To Negative On Growing Fiscal Vulnerabilities; 'AAA/A-1+' Ratings Affirmed," July 6, 2016). No sovereign is currently in selective default.
The eroding credit quality of rated sovereigns goes some way to explain the mild decline we have seen in the unweighted average sovereign rating. Since mid-2008, sovereign downgrades have generally outnumbered upgrades (see chart 2; for further details see "Sovereign Ratings History," published monthly).
Over the past five years, we have lowered more than two sovereign ratings per month on average, but raised only one--a pattern that has further continued in 2016, leading to a ratio of almost 3:1.
However, another reason for the decline in the unweighted average rating is that most of the new sovereign ratings we have assigned to countries in emerging or frontier markets have been in the lower rating categories. For example, our new ratings on sub-Saharan African sovereigns have predominantly been in the 'B' category.
Sovereigns with larger and wealthier economies, and therefore higher ratings, have experienced a similar trend. The GDP-weighted average rating currently stands at 'A+', which is in line with ratings a decade ago, but slightly lower than the 'AA-' peak in 2008-2011.
The downgrade of the U.S. in August 2011 clearly stands out in chart 3, because it is the world's largest economy. The three successive upgrades of China are also easily visible, as are the downgrades of several eurozone sovereigns, including France, Italy, and Spain in January 2012, and the two-notch downgrade of the U.K. in June 2016
More Downgrades Are Likely This Year
Negative outlooks have outnumbered positive outlooks since early 2008. The second half of 2015 saw a reversal of the gradually improving trend in the outlook balance that had begun in 2013.
On Dec. 31, 2016, the 30 negative outlooks outnumbered seven positive outlooks by a ratio of 4:1. The outlook balance (positive minus negative outlooks) has thus deteriorated to -23 from the seven-year high of -4 in June 2015, but improved from -30 in June 2016.
This outlook distribution suggests that negative rating actions are likely to continue to outnumber positive actions over the coming 12 months. Our rating outlooks are intended to indicate our view of the potential direction of a long-term credit rating, typically over six months to two years for investment-grade ratings ('BBB-' and higher) and six months to one year for speculative-grade ratings ('BB+' and lower).
A positive or negative outlook is intended to designate at least a one-in-three likelihood of a rating change in the indicated direction (see: "Outlooks: The Sovereign Credit Weathervane, Year-End 2013 Update," published on Feb. 4, 2014).
Over the past year, the outlook balance has deteriorated in Asia-Pacific and even more so in Latin America. The outlook balance in the Middle East, Commonwealth of Independent States (CIS), and Africa remains very high, but has somewhat improved over 2016 (to -10 from -12).
Asia-Pacific moved from a positive balance of 1 to a negative balance of -4 a year ago. The outlook balance deteriorated in Latin America where the negative balance went to -10 from -4, and in Europe where the outlook balance now is positive at 1 from -2 a year ago.
Europe has seen the strongest improvement among all regions in its outlook balance since 2011, when the region accounted for almost the entire global negative outlook bias--largely as a result of the eurozone crisis.
Having overcome the acute phase of the crisis, members of the European Monetary Union now carry outlooks that are more stable than at any point since the crisis first broke out. As of Dec. 31, 2016, we had two positive outlooks in the eurozone (on Cyprus and Slovenia) and no negative outlooks following the revised outlooks on Finland and France to stable from negative.
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