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21. Mar 2017 Scope research

Scope publishes revised sovereign rating methodology proposal and calls for comments

The revised methodology draws on rigorous quantitative and qualitative analytical framework • incorporation of 15 five-year forward-looking variables • first-time inclusion of financial stability risks • provides increased transparency and consistency.

Scope Ratings AG (Scope) is requesting market comments on a proposed revised methodology for sovereign ratings. The proposed changes aim at providing additional transparency and consistency in the analysis, including the adoption of a dual scorecard framework that the rating agency intends to use as a tool to rate sovereign issuers and their debt instruments. The methodology would apply to the 59 sovereign issuers that Scope currently rates on a subscription basis.

Scope's revised sovereign rating methodology provides added analytical value through:

  • comprehensive analysis using both quantitative and qualitative determinants of sovereign risk;
  • forward-looking rating framework explicitly incorporating five-year forecasts;
  • first-time inclusion of financial stability risk to explicitly account for risks stemming from the banking sector; and
  • rigorous rating analysis using sophisticated scoring systems to enhance transparency.

This disciplined approach helps to identify potential changes in sovereign risk. “Scope’s approach to sovereign ratings has strong analytical value by providing a detailed, comprehensive analysis of sovereign risk that uses forward-looking macroeconomic variables with systematic, formalised analysis of both quantitative and qualitative determinants of sovereign risk. Our rigorous rating analysis uses sophisticated scoring systems to enhance consistency and transparency”, says Dr Giacomo Barisone, Head of Public Finance at Scope and co-author of the methodology.

The methodology centres on five analytical categories: domestic economic risk, public finance risk, external economic risk, institutional and political risks, as well as financial stability risk. The emphasis is on public finances, debt dynamics and economic fundamentals, as these are the most important factors to identify sovereign distress as early as possible. Scope takes a through-the-cycle approach to emphasise fundamental factors for sovereign creditworthiness.

The new methodology increases the transparency of the rating process, generates greater consistency and rigour in the analysis, introduces Scope’s dual quantitative-qualitative approach, and is underpinned by new research on sovereign and global financial stability risks that have emerged after the global financial crisis.

Scope's sovereign ratings are an assessment of the sovereign’s ability and willingness to honour debt obligations to private-sector creditors in full and in a timely manner. Scope assigns both local-currency and foreign-currency ratings, using both long-term and short-term rating scales.

The application of Scope’s revised methodology may lead to adjustments of Scope’s currently rated sovereign ratings. Scope expects that approximately two-thirds of the sovereign ratings will move one or two notches, with a few sovereign ratings expected to move by three notches. In the proposed methodology Scope details the changes to the current methodology and the rationale for such changes.

The revised methodology will replace the previous sovereign rating methodology of the former FERI EuroRating Services AG, which Scope acquired in 2016.

Scope’s proposed methodology for sovereign ratings is published with a call for comments. Market participants are kindly requested to send comments and suggestions on the proposed methodology no later than 21 April 2017 to service@scoperatings.com.

Click here to download the proposed methodology.

 

Analyst Conference Call

Scope's public finance analysts will introduce the revised methodology in a telephone and web conference call on Tuesday, 28 March 2017, 3:00 pm GMT. Following a brief presentation, Scope analysts will be available to take questions.

When: Tuesday, 28 March 2017 at 3:00 pm GMT
How: Conference call and web presentation
Analysts: Giacomo Barisone, Ilona Dimitrieva, John Opie

Register for the call here.

Contact

Scope Ratings AG    Phone: +49 (0)30 27891-0
Giacomo Barisone    g.barisone@scoperatings.com
Oliver Müller    press@scopegroup.com