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Public Finance

Scope provides investors with sub-sovereign ratings. It relates to a sub-sovereign government’s relative capacity and willingness to honour its existing and future debt obligations to private sector creditors on time and in full.

What is a sub-sovereign government?

We define a sub-sovereign government as a particular level of regional or local government (RLG), which is assigned responsibilities to provide certain range of public services and sources of revenue to fund these mandates. We do not consider public or private companies undertaking some of the sub-sovereign government’s responsibilities as being part of that government, but we do assess links between them.

Qualitative vs quantitative approach

We use a raft of economic indicators and fiscal, debt and liquidity ratios to estimate a sub-sovereign government’s relative credit risk, but we do not limit our analysis to them. We assess the quality of budget, debt and liquidity management as well as political and policy priorities to understand how the financial position and indebtedness of a sub-sovereign may look in future. Thus, we combine qualitative and quantitative approaches to understand the narrative behind the ratios and translate a story or event into ratios.

Forecasting

We base our credit assessment of a sub-sovereign government on expected trends and developments rather than risks that have already materialised. To estimate future trends and developments we supplement our analysis of how economic and financial indicators performed in the past with new developments. The latter include both material changes in the institutional framework which a sub-sovereign government operates in; and/or shifts in the macroeconomic environment that could cause deviations from established trends in inflation, GDP, international trade or other indicators affecting this particular sub-sovereign.

Analytical framework for sub-sovereign credit ratings

Scope Ratings’ approach to assess credit risk associated with RLGs is based on the following eight factors:

  • institutional framework
  • economic and social profile
  • budget performance and flexibility
  • direct debt and debt-like instruments
  • contingent liabilities
  • cash and liquidity management
  • quality of management and budgeting
  • political risk