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Vision Finance is pleased to present Proprietary Vision Finance Sovereign Ratings model. Vision Finance has dedicated team focused on Sovereign, an area of strategic focus for an institution that is predominantly visibly focused on Emerging Markets.
Development of Proprietary Vision Finance Sovereign Ratings Model
Our Proprietary Model is done using our extensive experience in Emerging Markets. Traditional models do not take into account inflation risk, and they should, as even though there is no default, it does not mean that there is no loss. Vision Finance expects this model to gain further credibility going forward, as the inflation expectation for the Western World increase. At the moment we apply universally expected inflation information as provided by IMF. The formula used for implied cds takes into account many factors, including
Several Macro Inputs such as Inflation, Unemployment rate selected using the in depth knowledge of emerging markets
It is a confidential model of Vision Finance, which we use to calculate the global implied CDS values for our EM clients
Examining the significance of various dependent variables used in the study
We use an exhaustive collection of countries from all across the world used for the Unique Vision Finance Formula development. It is a groundbreaking work on the global perspective
Vision Finance Philosophy To Ratings
Our ratings are solely for the use by investors. Vision Finance assumes that any investment with below 50% chance of return is simply a C and we should not assign it a rating, as there are many other factors that come into play, including recovery values, dummy variables, recovery opportunity, etc. Our model will hence be misleading for such extreme cases. It is also possible that inflation measures are one off and temporary. We also assume that from the viewpoint of investor the optimal level of inflation is 0%, though we recognise that it is likely to be at least 2%, implying that from the sovereign perspective assuming a perfect management of the economy the maximum obtainable rating will be that of AA. Anything above that might in fact be suboptimal in the long run to the borrower, even if it is optimal in the medium term to the lender.
Big Picture
Sovereigns cannot go bankrupt, they can only default and reschedule. This has implications, as even if there is a moratorium on payments, one can expect a good recovery rate from their debt on the forward basis in some cases. We do not take into account GDP per person, in fact we are of believe that low income countries in the long term benefit from the concept of catch up, though this is not included in our statistic
Strengths of Our Model
Total objectivity
Looks only at numbers and not at data
We eliminated the subjectivity of our researchers, leaving that for step two of analysis (done by investors)
Some Limitations of Our Model
Our model does not look at past wealth but only last year, meaning that it does not calculate the accumulated wealth (like SWFs) or even value of assets or real estate of a given nation (issue for UK for instance)
It does not take into account the dummy variables of current crisis and wars but wars and dummies pass, and debt with countries remains even post war
Boundaries for Sovereign Ratings
MARKET GUIDE TO RATINGS
AAA: the best quality borrowers, reliable and stable . Includes: AAA, AAA-
AA: quality borrowers, a bit higher risk than AAA. Includes: AA+, AA, AA-
A: quality borrowers whose financial stability could be affected by certain economic situations. Includes A+, A, A-
BBB: medium class borrowers, which are satisfactory at the moment. Includes: BBB+, BBB, BBB-
BB: more prone to changes in the economy. Includes: BB+, BB, BB-
C: currently vulnerable and dependent on favourable economic conditions to meet its commitments. Can also turn highly vulnerable, resulting perhaps in bankruptcy or in arrears but still continuing to pay out on obligations.
RANK RATING From To
1 AAA 97.06 100
2 AAA- 94.12 97.05
3 AA+ 91.18 94.11
4 AA 88.24 91.17
5 AA- 85.29 88.23
6 A+ 82.35 85.28
7 A 79.41 82.34
8 A- 76.47 79.40
9 BBB+ 73.53 76.46
10 BBB 70.59 73.52
11 BBB- 67.65 70.58
12 BB+ 64.71 67.64
13 BB 61.76 64.70
14 BB- 58.82 61.75
15 B+ 55.88 58.81
16 B 52.94 55.87
17 B- 50.00 52.93
18 C 0.00 49.99
For more information about this model please contact Vision Finance Sovereign Team, led by Sujay Prasad, sp@financewithvision.net
Results
There was no AAA rating (why should there be?).
- UAE, Bahrain, Brunei, Kuwait AA+
- China, Qatar AA-
- Mexico, Saudi Arabia A+
- South Africa, Brazil A
- Russia, Poland, Kazakhstan A-
- German, Spain, Japan BBB
- UK, USA, Belgium, Italy BBB -
- Portugal, Argentina, Sweden BB+
- Switzerland, Kenya BB
- Ireland, Venezuela B
- Greece B-
- Liberia, Sierra L, Zimbabwe C
For full results and our Local Currency Debt analysis please consult our presentation below.
Welcome to the world of Vision Finance. Finance as it should be.
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