LocationsSTANDARD AND POOR’S
S&P Global’s sovereign methodology is available on their website and can be found at https://disclosure.spglobal.com/ratings/en/regulatory/article/-/view/sourceId/10221157. The methodology begins immediately by confirming that ‘all references to sovereign ratings… pertain to a sovereign’s ability and willingness to service financial obligations to nonofficial (commercial) creditors’. It goes onto to clarify that obligations owing to other governments (bilateral), supranationals like the World Bank or IMF (multilateral), or public-sector enterprises or local/regional governments, do not count.
S&P begin the methodological section with a helpful guide as to what broadly is considered within a rating:
Institutional Assessment – This refers to metrics relating to how the Government’s institutions and policymaking affect credit fundamentals. This may come in the form of the sustainability of public finances, the promotion of balanced economic growth, and the response strategies to economic and/or political shocks. Within S&P’s methodology this sector is conjoined to:
Economic Assessment – This assessment consists of examining metrics such as the GDP per Capita, assessments of the tax base, growth prospects, and economic diversity and volatility. When taken together, the ‘Institutional and Economic Profile’ can be developed.
External Assessment – On the other side of the methodological equation is the External Assessment, which considers the transactions and positions of all residents vis-à-vis the rest of the world. The agency looks at metrics such as the status of the sovereign’s currency on the world stage, the country’s external liquidity, and its external position (residents’ assets and liabilities in domestic and foreign currencies) relative to the rest of the world. This adjoined first to the:
Fiscal Assessment – which is concerned with the sovereign’s sustainability of deficits and debt burden. Aspects that come into focus here include fiscal flexibility, long-term fiscal trends and vulnerabilities, potential risks from contingent liabilities, and debt structure. To aid with assessment, the sector is divided into two segments: fiscal performance and flexibility, and then debt burden.
The last section is then the Monetary Assessment – metrics considered here include the exchange rate regime, and the credibility of monetary policies. This credibility is measured via inflationary trends, and the effect of monetary mechanisms on the real economy. When combined, these sectors lead to the sovereign’s ‘Flexibility and Performance Profile’.
This basis of the methodology is then factored by a six-point numerical scale, ‘1’ being the strongest and ‘6’ the weakest.
The scale used is simplistic. For example, if the agency deems a sovereign’s institutional and economic profile to be ‘moderately strong’, there is an expectation that the rating would not be far away from AA-. The matrix above acts as a guide for the analysts to guide themselves.