After a half-dozen years of dramatic movements in sovereign creditworthiness, calm has returned in Institutional Investor’s latest semiannual Country Credit survey. But there’s still plenty of tension beneath the surface.
The ratings of most major countries show little to no movement over the past six months. The U.S. edges up 0.3 point from September 2013, to 91.6 on a scale of zero to 100. That boosts the U.S. up one place, to seventh, in the ranking. The top five countries — Norway, Switzerland, Canada, Germany and Sweden — post insignificant declines of between 0.1 and 0.5 point. Moreover, respondents leave the ratings unchanged for China, Brazil and even Greece. Yet a number of emerging markets suffer significant declines, and the overall average rating edges down 0.4 point, to 44.2.
Analysts say many emerging-markets countries remain vulnerable to the big question marks hanging over the global economy: Will U.S. economic growth accelerate this year, and will the Federal Reserve Board continue to taper its bond purchases in coming months?
The small move in the U.S. rating reflects indecision among analysts over whether the U.S. economic glass is half empty or half full. Ben Bernanke’s Fed seemed convinced that the recovery was strong enough to begin tapering its bond-buying program in December and then tighten it another notch in January, but a weak January employment report raised questions about the pace of the U.S. recovery.
“There’s a general sense that Janet Yellen will pursue policies similar to Bernanke,” one European bank economist says of the new Fed chair, who stressed policy continuity in her first congressional testimony as head of the central bank on February 13. “The economy is growing — but slowly,” the economist adds.
When asked to predict when the Fed will make its first rate hike, 14.9 percent of survey participants said it would happen in the second half of 2014, 25.5 percent predicted it would take place in the first half of 2015, 34 percent called it for the second half of 2015, and 25.5 percent said it wouldn’t happen until 2016 or later.
Many analysts remain convinced of the long-term potential of emerging-markets economies, but for now “differentiation is very much the watchword,” says Nicholas Spiro, founder of Spiro Sovereign Strategy in London. Some ratings in Africa, Central Europe and Latin America are going up and others down, he says, because “there is a much more discerning investor base” than during earlier eras marked by concern about contagion. And these investors are reaching different conclusions about various countries, Spiro says, adding that “sentiment doesn’t always match fundamentals.”
How We Compiled the Ratings
Institutional Investor’s Country Credit ratings are based on information provided by senior economists and sovereign-risk analysts at leading global banks and money management and securities firms. The respondents have graded each country on a scale of zero to 100, with 100 representing the least likelihood of default. We weighted participants’ responses according to their institutions’ global exposure. Names of respondents are kept strictly confidential.
The March 2014 Country Credit survey was conducted by Researcher Valentina McKenzie and other II staff under the guidance of Senior Editor Jane B. Kenney.