Sovereign & Country Risks

Capturing the impacts of the 21st century’s risks

While Sovereign risk assessment specifically refers to the risk of a country defaulting on its debt obligations, Country risk assessment covers the whole range of drivers which may affect the business environment, including short and long term economic performance, demographic trends, domestic and international political contexts.

If these two objectives differ, the sovereign risk assessment largely relies on drivers included in country’s risk analysis, in particular the economic performance of the country – thus the numerous risks that could impact the growth potential in the short and long term.

Investors in sovereign bonds have to monitor a number of risks, often grouped in four pillars: economic growth, public finances, external risks, and socio-political stability. The rating of a sovereign bond, resulting from these analysis, should in theory drive the bond’s pricing.

However, the majority of risks analysts use Sovereign risk as a proxy of Country risk, for lack of a comprehensive methodology extending beyond the sole economic and financial indicators. This approach translates into an inadequate pricing of risk for investors:

  • In the context of generalized accommodative monetary policies, Sovereign and Country risks tend to diverge. Sovereign risk shall not be considered a valid proxy of Country risk as Sovereign risk tend to be lower than Country risk and Country risk tend to be underestimated.
  • Using an underestimated Country risk assessment as a cap on corporate credit risks leads to underestimating the actual risk level of portfolios.

Beyond Ratings provides Sovereign AND Country risks assessments. We develop an innovative and forward-looking methodology, mixing quantitative indicators and qualitative insights. The assessment of classic topics of business environment is combined with proprietary indicators of structural risks which are not available in the marketplace (such as in-depth energy transition analysis, climate change effects, resources scarcity).

Beyond Ratings’ provides sovereign risk scores for 85 countries. We assist our clients invested in foreign fixed income markets to monitor Sovereign and Country risks by continuously analyzing events that could change fixed income risk premiums. We also feed in-house credit risk models with advanced indicators and structured data sets.

AAA