The updated methodology can be downloaded here.

The update enhances the transparency and analytical rigour of Scope’s approach for assigning credit ratings to sub-sovereigns and introduces new analytical components relating to environmental and social considerations. The Sub-sovereigns Rating Methodology continues to be based on a ‘framework-driven approach’, reflecting the importance of the varying intergovernmental relationships between sub-sovereign and sovereign entities as well as the resulting country-specific budget structures, spending and investment responsibilities, debt management procedures, and liquidity practices.

Methodology highlights

Scope’s approach starts with the assessment of the intergovernmental integration between a sub-sovereign and its rating anchor – generally the respective sovereign or a higher-tier government – based on the assessment of the institutional framework under which a sub-sovereign operates. This determines a downward rating range vis-à-vis the rating anchor whereby, the higher (lower) the level of integration, the narrower (wider) the rating range. The framework assessment applies in general to all sub-sovereigns of the same government tier in a country and considers elements including: the record and form of budgetary support sub-sovereigns benefit from, their funding practices, the fiscal rules and oversight they are subject to, their revenue and spending powers.

The second key analytical component of the approach is the analysis of a sub-sovereign’s individual credit fundamentals, which is structured around four key risk pillars: Debt & liquidity, Budget, Economy and Governance. Additional adjustments to the resulting individual credit profile score can be done based on Environmental and Social factors, in case of wide regional disparities in terms of exposure to E&S risks and based on the sub-sovereign’s spending responsibilities as defined by their framework. Sub-sovereign’s individual credit characteristics are assessed based on peer benchmarking of quantitative metrics and detailed qualitative rationales.

The individual credit profile score is then mapped to the rating range determined by the framework assessment, to derive an indicative rating. An integrated institutional framework is a sufficient condition for a rating level close to the rating anchor, whereas a strong individual credit profile is necessary if there is a low level of integration.

Finally, we consider additional factors that could adjust the credit rating lower or higher and the conditions under which a sub-sovereign could be rated above the rating anchor.

Summary of the key changes

In this update, Scope:

• Expanded the granularity and refined the analytical focus of the key components of the institutional framework

• Withdrew the Core Variable Scorecard as a model and integrated the quantitative and qualitative assessments of the individual credit profile (ICP) into a unified scorecard

• Aligned the default definitions with Scope’s general default definitions and clarified that a default to official creditors will typically not lead to a default placement if the funding was provided in the context of a policy mandate

• Introduced a systematic and explicit approach to environmental and social considerations

• Implemented a mapping table which gives an indicative notching rather than a maximum indicative notching

• Changed qualitative scorecard structures and assessments and introduced qualitative assessment guidance tables to enhance analytical rigour and strengthen transparency

• Adopted additional editorial changes to improve clarity

The update does not affect existing sub-sovereign ratings or any other ratings assigned by Scope.