Fitch Briefing New Zealand 13 August 2013 g Sovereign Rating g g Methodology and New Zealand’s Credit Profile Andrew Colquhoun q Head of Asia-Pacific Sovereigns
Agenda Agenda Concepts and Definitions Concepts and Definitions Key Rating Factors Global Economic & Sovereign Credit Trends www.fitchratings.com 12/09/2013 1
Agenda Agenda Concepts and Definitions Concepts and Definitions Key Rating Factors Global Economic & Sovereign Credit Trends www.fitchratings.com 12/09/2013 2
Sovereign Issuer Default Ratings Sovereign Issuer Default Ratings Forward-looking assessment on the sovereign government’s willingness and ability to service senior, unsecured debts in full and on a timely basis—the y Issuer Default Rating (IDR) Local Currency Ratings y g Foreign Currency Ratings g y g Risk of default on local currency Take into account transfer and denominated and local currency convertibility risk, and indicate payable debt securities probability of default on foreign currency debts d bt All ratings have Positive/Negative or Stable Outlook (12-24 month horizon) th h i ) Rating Watches may also be applied (3-6 months) www.fitchratings.com 12/09/2013 3
Sovereign Rating Concepts Sovereign Rating Concepts • Local vs Foreign Currency Ratings • Sovereigns do sometimes default on LC debt despite power to tax print money • Sovereigns do sometimes default on LC debt despite power to tax, print money • Ordinal measure of credit risk on the ‘AAA’ scale • ‘AAA’ to ‘BBB-’ investment grade; ‘BB+’ to ‘D’ speculative grade • Not tied to a numerical, ex ante probability of default • Not a recommendation to buy/sell • F Forward-looking, timely, through-the-cycle d l ki ti l th h th l • Issuer Default Ratings and ratings of debt issues • Sovereign vs. Country risk • Country risk is a broader concept relating to legal and governance risks (rule of law etc) and transfer and convertibility risk • Country ceiling • Ceiling for other ratings in a country; relate to transfer and convertibility risk www.fitchratings.com 12/09/2013 4
Fitch’s Rating Scales Fitch s Rating Scales Investment Grade Speculative Grade AAA BB+ BB+ AA+ BB F1+ BB- AA B B B+ AA- B A+ B- F1 F1 A A- CCC F2 C BBB+ CC BBB C F3 F3 BBB- D RD/D Long Term Rating Short Term Rating Short Term Rating Long Term Rating Note: +/- modifiers no longer used between CCC and C categories www.fitchratings.com 12/09/2013 5
Sovereign Rating Methodology Sovereign Rating Methodology • Structural Factors • GDP per capita, economic diversification Sovereign Ratings (August 2013) • Financial system stability Distribution of 106 rated sovereigns Countries • Governance, rule of law 35 • Macroeconomic 30 • Sustainable growth without imbalances 25 • Rate and volatility of growth inflation Rate and volatility of growth, inflation 20 • Public Finances 15 • Debt level and structure 10 10 • Budget deficits and trends 5 • Market depth, “reserve currency” status 0 • External Finances External Finances RD RD CCC CCC B B BB BB BBB BBB A A AA AA AAA AAA • External debt level, structure • Current account, FX reserves, liquidity Source: Fitch Ratings www.fitchratings.com 12/09/2013 6
Sovereign Rating Model (SRM) • Rating model, not sovereign default • Rating model not sovereign default Rating Factor Weights Rating Factor Weights probability model Public • Empirically based on indicators Finances 29% 29% referenced in Fitch methodology • 17 statistically significant indicators • Forward-looking, through-the-cycle • Three-year averages used for more dynamic variables, e.g. fiscal balance, dynamic variables, e.g. fiscal balance, Structural Structural Macro incorporating one forecast year 49% 9% • Performance: 73% of actual ratings are Ext within one notch of SRM output f S Finances 13% Source: Fitch “Sovereign Rating Model, September 2012 www.fitchratings.com 12/09/2013 7
Issuer Default Ratings (IDR) Issuer Default Ratings (IDR) Cumulative 5-year Probability of Default (ex post) (%) 40 35 30 Investment grade Speculative grade 25 20 15 10 5 5 0 AAA AA A BBB BB B CCC Corporate Sovereign Note: Sovereigns data for 1995-2011, Corporate Finance data 1990-2011 Source: Fitch www.fitchratings.com 12/09/2013 8
Country Ceiling Country Ceiling – Notching Factors Notching Factors Country Ceiling captures risk of Sovereign Imposed Exchange Controls that Impede Private Sector’s ability to convert Local Currency into Foreign Currency and Transfer to Private Sector s ability to convert Local Currency into Foreign Currency and Transfer to Non-resident Creditors • Rule of Law/Governance/Institutional Factors • Reduces risk of arbitrary policy decisions • Openness to International Trade/Capital • Membership of Intl Orgs – • Discourages Controls on Trade/Investment • Macroeconomic Instability/Vulnerability = • Macroeconomic Instability/Vulnerability = Chronic Inflation/Fixed Exchange Rates Chronic Inflation/Fixed Exchange Rates • Country Ceiling Model Scores www.fitchratings.com 12/09/2013 9
Country Ceilings: Sovereign Ratings vs Country Country Ceilings: Sovereign Ratings vs. Country Ceilings Foreign Country Country Currency IDR Ceiling Comments Ghana Ghana B+ B+ B+ B+ Speculative grade sovereign Speculative grade sovereign Lesotho BB- A- Member of Common Monetary Area Indonesia BBB- BBB No history of exchange controls Greece B- B (was Euro area common country ceiling of AAA) ‘AAA’ withdrawn China A+ A+ Maintenance of capital controls p New Zealand AA AAA High grade sovereign Source: Fitch www.fitchratings.com 12/09/2013 10
Sovereign Rating Process Sovereign Rating Process • Rating visit to country • 2-3 analysts • 2-3 analysts • Meetings with government, central bank & other institutions • Quantitative and qualitative country-specific analysis • Peer analysis (comparative) • Sovereign Rating Model • An important input, but not a determinant of the rating • Sovereign rating committee (at least annually) • Issue Rating Action Commentary and publish report on website • Investor calls to subscribers • On-going surveillance • Subject to Fitch’s corporate regulatory and compliance requirements www.fitchratings.com 12/09/2013 11
Agenda Agenda Concepts and Definitions Concepts and Definitions Key Rating Factors Global Economic & Sovereign Credit Trends www.fitchratings.com 12/09/2013 12
Macroeconomic Policy and Prospects Track record of macroeconomic stability without excessive imbalances and underpinned by credible policy framework For New Zealand - Strengths: • Strong monetary framework, with lower and less volatile inflation than peers • Economic flexibility compared to other high-grade sovereigns y p g g g • Highly educated workforce, flexible labour market Weaknesses: • The five-year real GDP growth at 0.7% below ‘AA’ peer median (1.0%) • 10-year REER volatility (7.5%) higher than ‘AA’ median, reflecting influences 10 year REER volatility (7.5%) higher than AA median, reflecting influences from the global commodity cycle • Productivity remains below the OECD average www.fitchratings.com 12/09/2013 13
Macroeconomic Factors GDP Growth GDP Growth Inflation Level* Volatility** Level* Volatility** (pp) (pp) 5 5 10 10 8 4 6 3 4 2 2 1 0 0 0 d A A B D A B n A A B B / A d B A D C A B a n A B A B l A B / / a a C B A B e l / a B Z e Z w e e w w N N e N * 5-year average (2008-2012) ** 2012 data Source: Fitch “Sovereign Comparator”, July 2013 www.fitchratings.com 12/09/2013 14
External Finances Access to foreign exchange to service foreign currency obligations Access to foreign exchange to service foreign currency obligations • External finances is a key vulnerability for NZ’s credit profile • Persistent current account deficit drives up external debt liabilities • Persistent current account deficit drives up external debt liabilities • Fitch expects deterioration in trade balance owing to investment needs for Canterbury reconstruction • External indebtedness remains high relative to ‘AA’ peers • Net external debt (NXD) at 77.1% of GDP in 2012, higher than ‘AA’ median (-82.5%) • The bulk of external debt liabilities lie with the private sector The bulk of external debt liabilities lie with the private sector • The shift of net household savings rate to positive territory and public sector fiscal consolidation may reduce NXD over medium term www.fitchratings.com 12/09/2013 15
External Finances Net External Debt Net External Debt Current Account Balance Current Account Balance New Zealand Australia New Zealand Australia OECD median AA median OECD median OECD median AA median AA median (%CXR) (%GDP) 400 15 300 300 10 200 5 100 0 0 0 -5 -100 -200 -10 2007 2009 2011 2013f 2015f 2007 2009 2011 2013f 2015f Source: Fitch www.fitchratings.com 12/09/2013 16
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