Sovereign Risk Index

Sovereign Risk Index

Sovereign Bond Risk Index July 2016

Drawing on a pool of more than 30 measures spanning financial data, surveys and political insights, the BlackRock Sovereign Risk Index (BSRI) provides investors with a framework for tracking sovereign credit risk in 50 countries.

The BSRI breaks down the data into four main categories that each count toward a country’s final BSRI score and ranking: Fiscal Space (40%), Willingness to Pay (30%), External Finance Position (20%) and Financial Sector Health (10%). For full details, seeHOW IT WORKS below

Quarterly Update – July 2016

  • The U.K. suffered a hefty decline in its Willingness to Pay score in the wake of its vote to leave the European Union. Political risks have risen on a change in political leadership and uncertainties over the Brexit process. The UK’s overall ranking held steady at 18th place, but its Fiscal Space will come under scrutiny as the Brexit aftermath unfolds.
  • China posted the biggest rankings decline with a three-notch fall to 32nd place. This was mostly a result of shuffles of its close neighbours in the index. China’sFinancial Sector Health score slumped against a backdrop of rapid credit growth. Norway was another notable mover. Its score declined as falling oil revenues eroded its fiscal surplus, but the country remains the leader of the BSRI pack in rankings terms.
  • Greece climbed two notches to 47th place, its highest position since the index’s launch in 2011. An improvement in Fiscal Space amid fiscal austerity measures was the big driver. Venezuela, already at the bottom of the index, posted the largest score decline. Its scores fell across all four BSRI metrics on falling growth projections, weak oil prices and poor government effectiveness.

HOW IT WORKS

  • Fiscal Space—This category assesses if the fiscal dynamics of a particular country are on a sustainable path. It estimates how close a country is to breaking through a level of debt that will cause it to default (i.e., the concept of proximity to distress), and how large of an adjustment is necessary in order to achieve an appropriate debt/GDP level in the future (i.e., the concept of distance from stability).
  • External Finance Position—The factors in this category measure how leveraged a country might be to macroeconomic trade and policy shocks outside of its control.
  • Financial Sector Health—This category considers the degree to which the financial sector of a country poses a threat to its creditworthiness, were the sector were to be nationalized, and estimates the likelihood that the financial sector may require nationalization.
  • Willingness to Pay—In this category we group factors which gauge if a country displays qualitative cultural and institutional traits that suggest both ability and willingness to pay off real debts.

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