LM

Moody's Investors Service (2018). Sovereign Bond Ratings (30 p.) [s.l.]: Moody’s Investors Service.
(070833)
NOVEMBER 27, 2018 SOVEREIGN & SUPRANATIONAL
RATING METHODOLOGY Sovereign Bond Ratings
Table of Contents:
This updated credit rating methodology replaces “Sovereign Bond Ratings” dated December
SUMMARY 1
22, 2016. We have provided additional text to clarify how we use World Economic Forum
INTRODUCTION 2
(WEF) Global Competitiveness Index (GCI) scores as a scoring indicator for Growth Dynamics,
ABOUT THE RATED UNIVERSE 2
which is a sub-factor in Factor 1: Economic Strength. This clarification results from an October
ABOUT THIS RATING METHODOLOGY 2
2018 change in the WEF’s approach and scoring scale for its GCI.
DISCUSSION OF THE KEY RATING
FACTORS 7
MOODY’S RELATED RESEARCH 29
Summary
Analyst Contacts:
This rating methodology, and the scorecard that supports its application, explains Moody’s
FRANKFURT +49.69.70730.700 approach to assigning credit ratings to sovereigns globally. Our assessment of sovereign credit risk
Dietmar Hornung +49.69.70730.790 continues to be based on the interplay of four key factors: Economic Strength, Institutional
Associate Managing Director Strength, Fiscal Strength, and Susceptibility to Event Risk.
dietmar.hornung@moodys.com
LONDON +44.20.7772.5454
The purpose of the scorecard is to provide a reference tool that can be used to assess the factors
that are generally most important in assigning ratings to these entities. The scorecard is a
Matt Robinson +44.20.7772.5635 summary, and as such, does not include every rating consideration. The weights shown for each
Vice President - Senior Credit Officer/Manager factor and sub-factor in the scorecard represent an approximation of their importance for rating
matt.robinson@moodys.com decisions, but actual importance may vary significantly. In addition, the illustrative quantification
Yves Lemay +44.20.7772.1372 of various factor and sub-factor variables is generally derived from historical data.
Managing Director - Sovereign Risk
yves.lemay@moodys.com The aim of this methodology is to enable issuers, investors and other interested market
Alastair Wilson +44.20.7772.1372 participants to understand how Moody’s assesses credit risk in this sector, and explain how key
Managing Director - Global Sovereign Risk quantitative and qualitative risk factors map to specific scorecard outcomes. This report includes a
alastair.wilson@moodys.com detailed rating scorecard, which is a reference tool that is used as a starting point to assess credit
NEW YORK +1.212.553.1653
profiles within this sector.
Mauro Leos +1.212.553.1947

Vice President - Senior Credit Officer/Manager
mauro.leos@moodys.com
SINGAPORE +65.6398.8308
Gene Fang +65.6398.8311

Associate Managing Director
gene.fang@moodys.com
Marie Diron +65.6398.8310
Managing Director - Sovereign Risk
marie.diron@moodys.com
SOVEREIGN & SUPRANATIONAL
Introduction
This report includes the following sections:
» About the Rated Universe: an overview of Moody’s sovereign ratings.

» About This Rating Methodology: a description of the methodology’s framework and how its factors
combine to an alpha-numeric range on our rating scale.
» Discussion of the Key Rating Factors: a detailed explanation of each of the factors that drive sovereign
credit risk.
» Limitations of the Scorecard and Other Rating Considerations.
About the Rated Universe
Sovereign debt is used to generate funding for general government operations. Most countries issue a
combination of bonds, bills and notes, and their debt structure is based on market conditions and
government policy. In the vast majority of the world’s debt capital markets, national governments are the
largest borrowers and their credit standing provides a benchmark for other issuers of debt.
Moody’s long-term debt ratings provide ordinal rankings of credit, both within and across sectors, industries,
asset classes and geographies. They are relative rankings of credit risk that have, over time, become
associated with approximate levels of expected loss.
A number of characteristics distinguish sovereign bond issuers from other debtors and inform the approach
to assessing their creditworthiness. These characteristics include (1) a sovereign’s ability to curb
expenditures or modify the taxation of its citizenship in order to generate revenue with which to service
outstanding debt; (2) freedom from a higher authority to compel debt resolution and relieve the obligation
of collateral; and (3) the high probability of survival even after an event of default (i.e. countries rarely
disappear).
About This Rating Methodology
Moody’s approach to assigning bond ratings 1 to sovereigns, as outlined in this methodology, incorporates
the following key considerations and steps.
Identification of the Key Rating Factors

The rating methodology focuses on four broad rating factors, which in turn comprise sub-factors that
provide further detail (see Exhibit 1).
This publication does not announce

a credit rating action. For any
credit ratings referenced in this
publication, please see the ratings
tab on the issuer/entity page on
www.moodys.com for the most
updated credit rating action
information and rating history.
1 Moody’s also assigns local currency country risk ceilings and foreign currency ceilings to bonds and bank deposits for every rated country, to facilitate the assignment of
ratings to transaction and/or issuers domiciled in the country. For more information on ceilings, please see the cross-sector methodology Local Currency Country Risk
Ceiling for Bonds and Other Local Currency Obligations. A link to cross-sector methodologies and a link to Rating Symbols and Definitions can be found in the Moody’s
Related Research section of this report.
2 NOVEMBER 27, 2018 RATING METHODOLOGY: SOVEREIGN BOND RATINGS

EXHIBIT 1
Sub-factor
Weighting
Broad Rating Factors Rating Sub-Factor (towards Factor) Sub-Factor Indicators
Average Real GDP Growth t-4 to t+5
Growth Dynamics 50% Volatility in Real GDP Growth t-9 to t
WEF Global Competitiveness Indext
Factor 1: Economic
Scale of the Economy 25% Nominal GDP (US$) t
Strength
National Income 25% GDP per capita (PPP, $US) t
Credit Boom
Adjustments to Factor Score 0 - 6 scores
Other
Worldwide Government Effectiveness Index
Institutional Framework and
75% Worldwide Rule of Law Index
Effectiveness
Worldwide Control of Corruption Index
Factor 2: Institutional
Policy Credibility and Inflation Level t-4 to t+5
Strength 25%
Effectiveness Inflation Volatility t-9 to t
Track Record of Default
Other
General Government Debt/GDP t
Debt Burden 50%1
General Government Debt/Revenues t
General Government Interest Payments/Revenue t
Debt Affordability 50%1
General Government Interest Payments/GDP t
Factor 3: Fiscal Debt Trend t-4 to t+1
Strength
General Government Foreign Currency Debt/General Government Debt t
Other Public Sector Debt/GDP t
Public Sector Financial Assets or Sovereign Wealth Funds/
General Government Debt t
Other
Domestic Political Risk
Political Risk Max. Function2
Geopolitical Risk
Fundamental Metrics
Government Liquidity Risk Max. Function2
Market Funding Stress
Factor 4: Strength of Banking System
Susceptibility to
Event Risk Banking Sector Risk Max. Function 2
Size of Banking System
Funding Vulnerabilities
(Current Account Balance+FDI)/GDP t
External Vulnerability Risk Max. Function 2
External Vulnerability Indicator (EVI) t+2
Net International Investment Position/GDP t
Where a time series is used, historical and forecast data are typically equally weighted.
1 For a detailed description of how these weights may vary, please refer to Exhibit 12.
2 The aggregation of Political Risk, Government Liquidity Risk, Banking Sector Risk, and External Vulnerability Risk follows a maximum function, i.e. as soon as one area of risk warrants an
assessment of elevated risk, the country's overall Susceptibility to Event Risk is scored at that specific, elevated level.

1. Measurement or Estimation of the Key Rating Factors

We explain in the next section how the sub-factors for each factor are generally calculated or estimated for
use in the scorecard and the weighting for each individual sub-factor. We also provide a rationale for using
each sub-factor. The information used in assessing the sub-factors is generally drawn from a number of
international sources, including the International Monetary Fund, the Organization for Economic
Cooperation and Development, the European Commission, the World Bank, and the Bank for International
Settlements. Some indicators, however, particularly in the area of government and external debt, require
estimation by Moody’s analysts based on data provided by national statistical sources.
2. Mapping Factors to the Rating Categories

After estimating or calculating each sub-factor indicator, the outcomes for each of the indicators are
mapped to one of 15 ranking categories, ranging from Very High Plus (VH+) to Very Low Minus (VL-), and
then converted to the mid-point of the score range for the particular category in accordance with Exhibit 2.
Each numerical indicator score is multiplied by its respective weight (as shown in the factor tables), and
those products are summed to arrive at a numerical sub-factor score. Likewise, each numerical sub-factor
score is multiplied by its respective weight and the products are summed to arrive at a numerical factor
score, which is then mapped back to an alpha score, again using Exhibit 2. The factor scores for Factors 1-3
may then be adjusted up or down (as shown in those factor tables) in accordance with considerations
detailed in the Adjustments to Factor Score section of each rating factor discussion. In Factor 4, some of the
sub-factors are calculated in the same manner as the Factors 1-3 sub-factors, and some are determined as a
Max function of the individual indicators. In addition, adjustments may be made to the sub-factors in Factor
4. The overall Factor 4 score is determined as a Max function of the individual sub-factor scores. The Alpha
factor scores are then combined in accordance with the matrices in Exhibits 4, 5, and 6, as further detailed
in the following section.
EXHIBIT 2
Category VH+ VH VH- H+ H H- M+ M M- L+ L L- VL+ VL VL-
Score 100 85 - 80 - 75 - 70 - 65 - 60 - 55 - 50 - 45 - 40 - 35 - 30 - 25 - 20 -
Range - 85 80 75 70 65 60 55 50 45 40 35 30 25 20 1
Mid-Point 92.5 82.5 77.5 72.5 67.5 62.5 57.5 52.5 47.5 42.5 37.5 32.5 27.5 22.5 10.5
* The ranges include the lower number but exclude the higher number, except that the VH+ range is from (and including) 85 to (and including) 100.
3. Determining the Overall Grid-Indicated Outcome
EXHIBIT 3
Economic Institutional Fiscal Susceptibility to

Strength Strength Strength Event Risk
Economic Resiliency
Government Financial Strength
Government Bond Rating Range
Factors 1 and 2 (Economic Strength and Institutional Strength) combine into a construct we designate as
Economic Resiliency (see Exhibit 4).

EXHIBIT 4
Economic Resiliency: Combination of Economic Strength (F1) & Institutional Strength (F2)
Economic Strength
VH+ VH VH- H+ H H- M+ M M- L+ L L- VL+ VL VL-
VH+ VH+ VH+ VH+ VH VH VH- VH- H+ H+ H H H- H- M+ M
VH VH+ VH VH VH- VH- H+ H+ H H H- H- M+ M+ M M-
VH- VH+ VH VH- VH- H+ H+ H H H- H- M+ M+ M M L+
H+ VH VH- VH- H+ H+ H H H- H- M+ M+ M M M- L+
H VH VH- H+ H+ H H H- H- M+ M+ M M M- M- L
Insititutional Strength
H- VH- H+ H+ H H H- H- M+ M+ M M M- M- L+ L
M+ VH- H+ H H H- H- M+ M+ M M M- M- L+ L+ L-
M H+ H H H- H- M+ M+ M M M- M- L+ L+ L L-
M- H+ H H- H- M+ M+ M M M- M- L+ L+ L L VL+
L+ H H- H- M+ M+ M M M- M- L+ L+ L L L- VL+
L H H- M+ M+ M M M- M- L+ L+ L L L- L- VL
L- H- M+ M+ M M M- M- L+ L+ L L L- L- VL+ VL
VL+ H- M+ M M M- M- L+ L+ L L L- L- VL+ VL+ VL-
VL M+ M M M- M- L+ L+ L L L- L- VL+ VL+ VL VL-
VL- M M- L+ L+ L L L- L- VL+ VL+ VL VL VL- VL- VL-
An aggregation function then combines Economic Resiliency (ER) and Factor 3 (Fiscal Strength, or FS), as
illustrated by Exhibit 5: the weight of Fiscal Strength is highest for countries with moderate Economic
Resiliency. The rationale is that the creditworthiness of countries with high Economic Resiliency is less
susceptible to changes in their debt metrics, whereas the creditworthiness of countries with moderate
Economic Resiliency is more sensitive to changes in their Fiscal Strength. In contrast, the creditworthiness of
countries with low Economic Resiliency tends to be weak irrespective of debt metrics. The combination of
these three factors results in a preliminary, indicative alpha-numeric range on our rating scale.

EXHIBIT 5
Government Financial Strength: Combination of Economic Resiliency (F1xF2) & Fiscal Strength (F3)
Fiscal Strength Weight (ER/FS)
VH+ VH+ VH+ VH+ VH+ VH+ VH+ VH+ VH+ VH+ VH VH VH VH VH VH-
VH VH VH VH VH VH- VH- VH- VH- VH- H+ H+ H+ H+ H+ H 80/20
VH- VH VH- VH- VH- VH- H+ H+ H+ H+ H+ H H H H H-
H+ VH- VH- H+ H+ H+ H H H H H- H- H- M+ M+ M
H VH- H+ H+ H H H H- H- H- H- M+ M+ M+ M M 70/30
Economic Resiliency
H- H+ H H H H- H- H- M+ M+ M+ M+ M M M M-
M+ H+ H H H- H- M+ M+ M+ M M M- M- M- L+ L
M H H- H- H- M+ M+ M M M M- M- L+ L+ L+ L 60/40
M- H H- M+ M+ M+ M M M- M- M- L+ L+ L L L-
L+ M+ M M M M- M- M- M- L+ L+ L+ L+ L L L-
L M M- M- M- M- L+ L+ L+ L+ L L L L L- L- 75/25
L- M- M- L+ L+ L+ L+ L L L L L- L- L- L- VL+
VL+ L- L- L- L- L- L- L- L- VL+ VL+ VL+ VL+ VL+ VL+ VL+
VL VL+ VL+ VL+ VL+ VL+ VL+ VL+ VL+ VL+ VL VL VL VL VL VL 90/10
VL- VL- VL- VL- VL- VL- VL- VL- VL- VL- VL- VL- VL- VL- VL- VL-
As a final step, a country’s Susceptibility to Event Risk (Factor 4) is a constraint which can only lower the
preliminary alpha-numeric range that results from combining the first three factors. 2 This will not happen
when Event Risk is scored as ‘Very Low’, but will happen with increasing severity as the risk is assessed from
‘Low’ to ‘Moderate’ to ‘High’ to ‘Very High.’ Exhibit 6 shows the methodology scorecard output as the
midpoint of the three-notch alpha-numeric range that is the final result of the sequential combination of
the rating factors.
EXHIBIT 6
Alpha-numeric Range: Combination of Government Financial Strength (F1xF2xF3) & Event Risk (F4)
Aaa - Aa2 Aa1 - Aa3 Aa2 - A1 Aa3 - A2 A1 - A3 A2 - Baa1 A3 - Baa2 Baa1 - Baa3 Baa2 - Ba1 Baa3 - Ba2 Ba1 - Ba3 Ba2 - B1 Ba3 - B2 B1 - B3 B2 - Caa
VL- Aa1 Aa2 Aa3 A1 A2 A3 Baa1 Baa2 Baa3 Ba1 Ba2 Ba3 B1 B2 B3
VL Aa1 Aa2 Aa3 A1 A2 A3 Baa1 Baa2 Baa3 Ba1 Ba2 Ba3 B1 B2 B3
VL+ Aa1 Aa2 Aa3 A1 A2 A3 Baa1 Baa2 Baa3 Ba1 Ba2 Ba3 B1 B2 B3
Factor 4: Susceptibility to Event Risk
L- Aa1 Aa2 Aa3 A1 A2 A3 Baa2 Baa3 Ba1 Ba2 Ba3 B1 B2 B3 Caa1

L Aa1 Aa2 Aa3 A1 A2 A3 Baa2 Baa3 Ba1 Ba2 Ba3 B1 B2 B3 Caa1
L+ Aa1 Aa2 Aa3 A1 A2 A3 Baa2 Baa3 Ba1 Ba3 B1 B2 B3 Caa1 Caa2
M- Aa2 Aa3 A1 A2 A3 Baa1 Baa3 Ba1 Ba2 Ba3 B1 B2 B3 Caa1 Caa2
M Aa2 Aa3 A1 A2 A3 Baa1 Baa3 Ba1 Ba2 B1 B2 B3 Caa1 Caa2 Caa3
M+ Aa3 A1 A2 A3 Baa1 Baa2 Ba1 Ba2 Ba3 B1 B2 B3 Caa1 Caa2 Caa3
H- Aa3 A1 A2 A3 Baa1 Baa2 Ba1 Ba2 Ba3 B2 B3 Caa1 Caa2 Caa3 Caa3
H A1 A2 A3 Baa1 Baa2 Baa3 Ba2 Ba3 B1 B2 B3 Caa1 Caa2 Caa3 Caa3
H+ A1 A2 A3 Baa1 Baa2 Baa3 Ba2 Ba3 B1 B3 Caa1 Caa2 Caa3 Caa3 Caa3
VH- A2 A3 Baa1 Baa2 Baa3 Ba1 Ba3 B1 B2 B3 Caa1 Caa2 Caa3 Caa3 Caa3
VH A2 A3 Baa1 Baa2 Baa3 Ba1 Ba3 B1 B2 Caa1 Caa2 Caa3 Caa3 Caa3 Caa3
VH+ A3 Baa1 Baa2 Baa3 Ba1 Ba2 B1 B2 B3 Caa1 Caa2 Caa3 Caa3 Caa3 Caa3
Note: outcomes displayed are the midpoint of the three-notch range, e.g. a Aa1 in the grid above would indicate a scorecard-indicated outcome range of Aaa-Aa2
2
Note that, for the first three factors, the 15 scoring categories refer to intrinsic strength; thus, Very High Plus is the best score. For Factor 4, the scores refer to the level
of risk; thus, Very Low Minus is the best score.

4. Approach for distinguishing between local currency and foreign currency debt ratings
As a rule, a sovereign rating will apply to obligations in both local currency (LC) and foreign currency (FC).
Currently, we only maintain rating gaps in select cases and subject to certain criteria, which are further
explained below.
Our approach reflects global economic and market developments, as well as our own empirical research on
sovereign defaults. The justifications for distinguishing between LC and FC government bond ratings are
limited as (1) both current and capital account openness have increased; (2) capital markets (especially
those in emerging markets) have liberalised and deepened; and (3) governments’ investor bases have
broadened and partially moved offshore. Crucially, it is now far more likely than it used to be that problems
in servicing debt in one currency will spill over and affect a government’s ability to service its debt in
another. This conclusion is supported by the recent history of sovereign defaults, which does not offer a
strong justification for credit quality differentiation in favour of either LC or FC debt.
A rating gap (a notching between a government’s LC and FC bond ratings) is now only applied in those cases
where there is (1) limited capital mobility; and (2) a government which either faces constraints in terms of
external liquidity, or, in exceptional cases, shows a material and observable distinction between its ability
and willingness to repay creditors in LC versus FC, or vice versa (the fulfilment of the latter criterion in
favour of FC creditors could, in rare cases, give rise to a rating distinction in favour of FC obligations).
However, even if these two necessary conditions are met, the opening of a ratings gap is not certain. For
example, we may not apply a gap if we believe that the two conditions could evolve over the foreseeable
future – for instance, if a government were likely to open up the capital account of the balance of payments,
or if a country’s external position were likely to improve considerably.
The size of any rating distinction in favour of LC obligations depends on the severity of the external liquidity
constraint. Any gap larger than two notches (either positive or negative) would be very rare since it would
suggest a starker segregation between a government’s LC and FC operations than would be justified by
historical experience. This is supported by the increase in default probability historically associated with
each notch of differential.
Discussion of the Key Rating Factors
Moody’s sovereign risk analysis focuses on four broad factors:

1. Economic Strength
2. Institutional Strength
3. Fiscal Strength
4. Susceptibility to Event Risk

Factor 1: Economic Strength

EXHIBIT 7

Economic Resiliency
Why it matters
The first factor we consider is a sovereign’s Economic Strength. The intrinsic strength of the economy –
focusing on growth potential, diversification, competitiveness, national income, and scale – is important in
determining a country’s resilience or shock-absorption capacity. A sovereign’s relative ability to generate
revenue and service debt over the medium term relies on fostering economic growth and prosperity.
A lack of Economic Strength has been a decisive factor in past sovereign defaults, generally occurring when
countries have had weak economic prospects. In a large number of cases, there was an erosion of external
competitiveness either by a major terms-of-trade shock (e.g., the fall in oil prices in the late 1990s in the
case of Russia), or by a series of smaller permanent shocks over time, that led to a loss of export revenues
(e.g., a fall in world banana prices and a slump in tourism after 11 September 2001 in Caribbean countries,
which then combined with damages from natural disasters to lead to persistent current account imbalances
and the accumulation of high debt levels and some defaults). Large diversified economies are much more
resilient to such external shocks than smaller non-diversified countries. 3
In terms of the historical importance of Economic Strength and the correlation with credit stress, our
research on 29 sovereign defaults between 1997 and 2012 indicates that long-term economic stagnation
was the principal underlying cause of default in 10% of cases and a contributing factor in many others.
Moreover, defaults occurring as a result of chronic economic stagnation coupled with large external shocks
are generally associated with a lower-than-average recovery rate. In 41% of cases, a high debt burden was
the primary driver of default. While a variety of issues can be the cause of a high debt burden, the inability
to generate sufficient economic growth to service and gradually reduce outstanding debt is often what
ultimately makes the high debt burden unsustainable. Whether it be cause or effect, past sovereign defaults
have occurred in the context of severe economic stress, underscoring the importance of Economic Strength
in reducing the likelihood of default in the face of adverse shocks or an economic downturn.
3 Certain measurements for this factor, further discussed below, overlap with those supporting indicators of economic development produced by the World Bank and other
institutions. In that context we note that the methodology and scorecard do not distinguish between countries by their stage of development (e.g. high, middle, low,
advanced industrial vs. emerging vs. frontier, etc.) beyond the analysis in factors 1 and 2.

EXHIBIT 8
Sub-factor Indicator
Broad Weighting Weighting
Rating Rating (towards Sub-Factor (towards
Factors Sub-Factor Factor) Indicators Sub-Factor) VH+ VH VH- H+ H H- M+ M M- L+ L L- VL+ VL VL-
Growth 50% Average Real GDP 50% ≥ 4.5 4-4.5 3.5-4 3-3.5 2.75-3 2.5-2.75 2.25-2.5 2-2.25 1.75-2 1.5-1.75 1.25-1.5 1-1.25 0.75-1 0.5- < 0.5
Dynamics Growth t-4 to t+5 0.75
Volatility in Real 25% < 1.44 1.44- 1.66- 1.76- 1.96- 2.11-2.20 2.20- 2.29- 2.49- 2.64- 2.85- 3.14- 3.36- 3.72- ≥ 3.95
GDP Growth t-9 to t 1.66 1.76 1.96 2.11 2.29 2.49 2.64 2.85 3.14 3.36 3.72 3.95
WEF Global 25% ≥ 4.98 4.61- 4.52- 4.45- 4.39- 4.31- 4.26- 4.22- 4.1-4.22 4.03-4.1 3.95- 3.9- 3.84- 3.75- < 3.75
Competitiveness 4.98 4.61 4.52 4.45 4.39 4.31 4.26 4.03 3.95 3.9 3.84
Factor 1: Index**
Economic
Strength Scale 25% Nominal GDP 25% ≥ 1,000 500- 400- 300- 250-300 200-250 175-200 150-175 125-150 100-125 75-100 50-75 25-50 10-25 < 10
(US$ bn) t 1,000 500 400
National 25% GDP per capita 25% ≥ 35,175 30,130- 25,918- 24,045- 20,402- 18,001- 16,297- 13,587- 11,863- 10,656- 8,577- 7,708- 5,919- 4,320- < 4,320
Income (PPP, US$) t 35,175 30,130 25,918 24,045 20,402 18,001 16,297 13,587 11,863 10,656 8,577 7,708 5,919
Adjustments 0 - 6 scores Credit Boom 0 - 3 scores

to Factor max
Score Other 0 – 6 scores
* The convention for cut-off points in each sub-factor scoring range in this factor table (as well as those that follow) is: from (and including) the smaller number in the range, to (but excluding) the larger number in the range. This
convention also can be inferred based on which end of the range the < symbol versus the ≥ symbol appears. For instance, for Average Real GDP Growth, there is a < symbol at the numerically lowest point of the sub-factor grid
ranges (<0.5), and there is a ≥ symbol at the numerically highest point of the sub-factor grid range (≥ 4.5). The VL range of 0.5 – 0.75 therefore means from (and including) 0.5 to (but excluding) 0.75, with the convention
continuing up the scale. For Volatility in Real GDP Growth, the scale is reversed (metrics falling in a lower-value range yield a better score), but it follows the same convention. There is a < symbol at the numerically lowest point
of the sub-factor grid ranges (<1.44), and there is a ≥ symbol at the numerically highest point of the sub-factor grid range (≥ 3.95). The VL range of 3.72 – 3.95 therefore means from and including 3.72 to but excluding 3.95.
** In October 2018, the WEF introduced a new scoring scale for Global Competitiveness that ranges from 0 to 100. For the time being, the scorecard in this methodology continues to use the most recent score published by the
WEF that is expressed on the previous seven-point scale. If we consider that a country’s competitiveness has changed materially since the most recent scoring on the seven-point scale, we may adjust the Economic Strength
factor score to recognize this change. Our view on competitiveness may also be informed by WEF Global Competitiveness Index scores on the new scale.

The specific sub-factors and indicators that we score are:
a. Growth dynamics
Low growth prospects amplify debt serviceability challenges and can render a heavy debt burden
unsustainable. In contrast, countries experiencing strong, sustained growth have historically been successful
in managing relatively large debt burdens and eventually reversing increases in debt-to-GDP ratios caused
by macroeconomic shocks or banking crises.
The methodology incorporates a number of objective and globally consistent indicators into the assessment
of a sovereign’s economic growth dynamics. To smooth purely cyclical effects, we look at multi-year
averages for the respective flow variables.
The key indicators and proxies for growth dynamics include:
» Recent performance and medium-term outlook for real GDP growth;

» Volatility in the rate of recent real GDP growth;
» Competitiveness and innovation utilizing the World Economic Forum (WEF) Global Competitiveness
Index.
A number of countries have missing WEF data. Where that is so, we use as a proxy the Government
Effectiveness scores from the Worldwide Governance Indicators prepared by researchers associated
with the World Bank Development Research Group, the Natural Resource Governance Institute, and
the Brookings Institution. We consider these Worldwide Governance Indicators to have strong
predictive power for the Global Competitiveness Index. This is consistent with our view that strong
institutions are essential for economies to improve their non-price competitiveness, mainly because of
the spill-over effects of governance onto other economic variables, many of which fall under the aegis
of Total Factor Productivity growth, which in itself is a reasonable proxy for non-cost competitiveness.
b. Scale of the economy
Scale is also an important driver of creditworthiness. A very small, but very rich country can be subject to an
abrupt change of economic fortune. By contrast, a larger, more diversified economy has a higher capacity to
generate sufficient and stable revenues for a sovereign to service outstanding debt. The key indicator for the
scale of an economy is the measure of its nominal GDP.
c. National income
Dividing the measure of economic output in a country by the population provides a measurement of the
income level of a country’s citizens. High income is generally closely correlated with a low risk of default.
National income is measured by GDP per capita in purchasing power parity terms.
GDP per capita is given a one-quarter weighting in the methodology scorecard for Economic Strength.
d. Adjustments to Factor Score
» Credit Booms:
We incorporate a ‘credit boom’ adjustment into our assessment of Economic Strength where applicable.
This adjustment to the Factor Score evaluates whether excessive credit growth is flattering the key
indicators that are used to assess Economic Strength (such as GDP growth, GDP per capita, nominal GDP) in
an unsustainable way.

Our assessment has two aspects.
- First, we assess how likely it is that credit growth has been excessive and cannot be sustained.
Generally speaking, credit growth that has been close to or more than two times nominal GDP
growth for two or more years is a leading indicator. The longer that condition has persisted, the
greater the probability we typically assign to a credit bust – a rapid contraction in credit.
- Second, we assess the potential severity of any subsequent financial event based on the size of
the stock of domestic credit relative to GDP (based on the assumption that, as the size of
domestic credit as a proportion of GDP increases, so does the potential severity of a credit boom-
bust cycle, thus resulting in depressed GDP growth).
In instances in which we consider that credit growth is excessive and the risks of a credit boom-bust cycle
are building, the assessment of Economic Strength will be constrained accordingly. By way of historical
example, in Ireland annual credit growth exceeded nominal GDP growth by close to 2 times in four years
between 2003 and 2007 before the country went into recession in 2008. 4
This ‘credit boom’ factor adjustment can only lower the overall assessment of the sovereign’s Economic
Strength. For most countries, the ‘credit boom’ risk will be neutral for the assessment of Economic Strength.
However, when the combination of the probability of excessive credit growth and its severity lead to a
medium, high or very high assessment of risk, this can result in Economic Strength being lowered by one,
two or three scores, respectively.
» Other adjustments to Factor Scores
We may also adjust our assessment of a sovereign’s Economic Strength to reflect levels of scale, wealth,
flexibility and diversity that enhance the strength of the economy but may not be fully reflected in the
scorecard metrics, or that have a larger impact than indicated by the standard weight for these sub-factors.
Such adjustments are not routine. The benefits of scale and wealth are explicitly captured in this factor.
Taken together, scale, volatility and wealth are generally strong proxies for diversity and flexibility. Large
economies tend to be highly diverse, while low volatility tends to indicate higher adjustment capacity
typically associated with flexible, diverse economies. Wealth is generally a strong indicator of ability to
absorb shocks. However, certain circumstances may warrant adjustments beyond what the scorecard
indicates:
- Unusual scale
For example, some countries’ sizes are outliers relative to the overall rated universe. Where economies
are either extremely large or small, we may find that our scorecard understates (for extremely large
countries) or overstates (for extremely small countries) a sovereign’s Economic Strength relative to its
peers. In such circumstances we adjust our assessment of Economic Strength upwards or downwards
relative to the score indicated by the quantitative ratios in the scorecard. The level of the adjustment
reflects our overall, case-by-case assessment of the extent to which unusual scale will foster or hinder
growth, contain or exacerbate volatility or offer the sovereign a ready source of revenues, rather than a
formulaic approach that may not be appropriate for all situations.
- Unusual wealth
Similarly, some countries exhibit wealth levels that are outliers relative to the overall rated universe.
Where there are extremes of wealth or poverty, we may find that the scorecard metrics understate or
overstate a sovereign’s Economic Strength relative to its peers. In such circumstances we adjust our
4 An IMF Staff Discussion Note calibrated a credit boom somewhat differently, although the results are essentially the same. We take the flows of credit and national
income that affect domestic credit and GDP. The IMF’s conditions are (1) the deviation from trend is greater than 1.5 times its standard deviation and the annual growth
rate of the credit-to-GDP ratio exceeds 10 percent; or (2) the annual growth rate of the credit-to-GDP ratio exceeds 20 percent. “Policies for Macrofinancial Stability:
How to Deal with Credit Booms.” Dell’Ariccia, Igan, Laeven, Tong, Bakker and Vandenbussche. June 7, 2012.

assessment of Economic Strength upwards or downwards relative to the score indicated by the
quantitative ratios in the scorecard. As with the unusual scale adjustment, the level of the unusual
wealth adjustment reflects our overall, case-by-case assessment of the extent to which unusual wealth
will foster or hinder growth, contain or exacerbate volatility or offer the sovereign a ready source of
revenues.
- Unusual diversity
We may also adjust up our assessment of Economic Strength where we consider an economy to be
unusually diverse or flexible for its scale, and where economic size therefore understates the
economy’s true resilience. This is generally only the case in smaller, less well developed economies
since large economies are assumed to be highly diverse and flexible. In reaching such a conclusion we
assess a wide range of metrics, including the distribution of different sectors’ gross value added in the
economy’s annual output relative to similarly sized peers’ and detailed WEF indicators.
- Unusual concentration – commodities
Conversely, high economic dependence on a single product or service as a percentage of GDP may be
credit negative. This is most common in the case of countries that are highly dependent on production
and export of a commodity (or a group of highly correlated commodities) for growth or government
revenues. Exposure to an unexpected but plausible shock to demand for that commodity implies a lack
of growth resilience that may not be evident from the standard metrics in the scorecard, even over the
10-year time period covered in the scorecard. The risk associated with a large concentration in
commodities diminishes when a country produces a diverse set of commodities whose price
movements and international demand trends exhibit weak correlation with one another.
Where we conclude that high dependence exists and is not mitigated by large stores of resources that
can be cheaply accessed, we would lower our assessment of Economic Strength relative to the score
implied by the scorecard. We would generally consider a sovereign to be ‘highly dependent’ when
commodities account for more than half of all exports, and exports account for more than a quarter of
GDP. We would generally exclude sovereigns whose F1 score would in any event fall in the ‘VL’
category, where small scale and high concentration are already common features.
- Large stocks of natural resources
In assessing the credit implications of high reliance on commodities we also take into account the
extent of proven reserves and production costs, since large reserves which can be accessed cheaply
may allow the sovereign to adjust output to mitigate a price shock. Indeed, unusually large stores of
natural resource wealth offer some assurance of growth over the longer-term even in more diversified
economies and may prompt upward adjustments in our assessment of Economic Strength.
Given inevitable uncertainty about the extent to which as-yet-unrealised stores will support growth in
the more distant future and about the sovereign’s ability to monetise them when needed, we will
rarely adjust our assessment of Economic Strength by more than a notch for natural resource wealth.
However, where proven oil or gas reserves are projected to last more than 50 years, or proven reserves
of other commodities are in the top 15th percentile amongst global producers; and where cost of
production is in the lowest decile amongst global producers; we would take that into account as a
mitigation for excessive concentration.
Those thresholds are approximate and would not typically lead to an immediate cliff effect in our
adjustment if they were crossed. In addition, any adjustment we may make is informed by the
diversity of the commodities mix, our view on demand for particular commodities over the medium
term and our assessment of the strength of the country’s governance, which can play an important
role in determining whether the sovereign’s revenues are likely to benefit from natural resource
reserves over the medium term.

- Structural shifts
We may also adjust our assessment where an economy is undergoing a process of change (positive or
negative) that backward-looking metrics fail to capture. For example, far-reaching structural change
may offer the prospect of the economy becoming less susceptible to shocks, which may not yet be
captured in size, volatility or competitiveness metrics (though they would typically be reflected in
growth forecasts). Since some degree of structural change is a continuous feature of most economies,
to result in a factor adjustment, the changes need to be sufficiently far-reaching to justify singling out
the economy in question.
Additional factor adjustments may be considered in our assessment of Economic Strength over time if we find
that another indicator can provide a universally high degree of explanatory value for Economic Strength.
Factor 2: Institutional Strength

EXHIBIT 9

Economic Resiliency
Why it matters
The second factor we consider is whether the country’s institutional features are conducive to supporting its
ability and willingness to repay its debt. A related aspect of Institutional Strength is the capacity of the
government to conduct sound economic policies that foster economic growth and prosperity.
About 30% of past sovereign defaults have been directly related to institutional and political weaknesses,
ranging from political instability to weak budget management and governance problems or to political
unwillingness to pay. Mongolia’s default in 1997 and Cameroon’s 2004 default were related to weak budget
management institutions and political uncertainty. Paraguay’s restructuring in 2002-04 was related to a
combination of prolonged weak economic performance, political instability, governance problems and
contagion from the regional crisis. Venezuela’s default in 1998 is an example of payment delays caused by
administrative problems. Ivory Coast declared a moratorium on debt payments in 2000 within the context
of a military coup and civil conflict. Most recently, Ecuador’s default in 2008 was an example of political
unwillingness to repay. These defaults due to institutional and political factors have occurred even at
relatively low debt-to-GDP levels.
Our assessment does not differentiate by form of government. Economic growth and prosperity, or the lack
thereof, is evident in democracies as well as authoritarian states. Moreover, both democratic and
authoritarian governments have defaulted. Nonetheless, mature democratic systems dominate the very
highest rating level, Aaa, reflecting a stronger rule of law, greater transparency and a longer history of
institutional development which have resulted in a relatively high degree of confidence in the sovereign
government and high levels of prosperity.

EXHIBIT 10
Sub-factor Indicator
Broad Weighting Weighting
Rating Rating Sub- (towards Sub-Factor (towards
Factors Factor Factor) Indicators Sub-Factor) VH+ VH VH- H+ H H- M+ M M- L+ L L- VL+ VL VL-
Institutional 75% Worldwide 50% ≥ 1.14 1.01- 0.85- 0.48- 0.34- 0.25- 0.11- (0.01)- (0.10)- (0.17)- (0.35)- (0.41)- (0.50)– (0.72)- < (0.72)
Framework Government 1.14 1.01 0.85 0.48 0.34 0.25 0.11 (0.01) (0.10) (0.17) (0.35) (0.41) (0.50)
and Effectiveness
Effectiveness* Index
Worldwide 25% ≥ 0.98 0.81- 0.64- 0.48- 0.26- 0.06- (0.08)- (0.15)- (0.29)- (0.35)- (0.45)- (0.57)- (0.71)- (0.82)- < (0.82)
Rule of Law 0.98 0.81 0.64 0.48 0.26 0.06 (0.08) (0.15) (0.29) (0.35) (0.45) (0.57) (0.71)
Index
Worldwide 25% ≥ 1.03 0.82- 0.56- 0.32- 0.13- (0.06)- (0.19)- (0.29)- (0.39)- (0.44)- (0.58)- (0.64)- (0.79)- (0.91)- < (0.91)
Factor 2: Control of 1.03 0.82 0.56 0.32 0.13 (0.06) (0.19) (0.29) (0.39) (0.44) (0.58) (0.64) (0.79)
Institutional Corruption
Strength Index
Policy 25% Inflation 50% 1.3-2.5 1.2 -1.3 1.1-1.2 & 1-1.1 & 0.9-1& 0.8-0.9 0.7-0.8 0.6-0.7& 0.5-0.6& 0.4-0.5 0.3-0.4 0.2-0.3& 0.1-0.2& 0-0.1 & <0&≥
Credibility Level t-4 to t+5 & 2.5 -3 3-3.5 3.5-4 4-5 & 5-6 & 6-8 8-10 10-12.5 &12.5-15 &15-17.5 17.5-20 20-22.5 22.5-25 25
and
Effectiveness Inflation 50% < 1.2 1.2-1.4 1.4-1.7 1.7-2 2-2.1 2.1-2.5 2.5-2.6 2.6-2.7 2.7-3.1 3.1-3.4 3.4-3.6 3.6-3.8 3.8-4.5 4.5-5.6 ≥ 5.6
Volatility t-9 to t
Adjustments 0 - 6 scores Track Record of 0 – 3 scores
to Factor max Default
Score
Other 0 – 6 scores
* Numbers in parenthesis denote negative numbers.

The specific indicators that we score are:

a. Institutional framework and effectiveness
The World Bank’s Worldwide Governance Indicators form an important part of our assessment of the
fundamental institutional framework of a country, as they offer a quantitative and at least somewhat
comparable measure of Institutional Strength.
» Government Effectiveness: In our opinion, the most relevant features of this Worldwide Governance
Indicator are the quality of governmental bureaucracy and administration. It also attempts to capture
policy planning, implementation capabilities, and the independence of the public service from political
interference. An aspect which is of particular interest is a measurement of the quality of budget
management.
» Rule of Law: The features of this Worldwide Governance Indicator which we find relevant are the
measurements of contract enforcement, property rights, the independence of the judiciary and trust in
the judicial system. All of these elements are essential for a well-functioning economic system.
» Control of Corruption: The features of this Worldwide Governance Indicator relevant to our analysis are
the extent to which public power is exercised for private gain, as well as the capture of the economy by
elites, the bureaucracy or special interests. Transparency and the accountability of the public sector is a
key focus of this indicator.
b. Policy credibility and effectiveness
We complement the Worldwide Governance Indicators with an assessment of the policy effectiveness of a
country, focusing on the central bank’s credibility and scope for action. Inflation measures are included in
the scorecard as a proxy for policy effectiveness and credibility, on the assumption that the ability of the
monetary authorities to contain inflation provides a reasonable insight into the broader capacity of the
country’s institutions to articulate and achieve credit-friendly policies.
» Inflation Performance: We chose this as our main proxy for policy credibility and effectiveness because
sustainable economic growth and prosperity are best achieved with price stability. Inflation is also a
determinant of an economy’s competitiveness. Inflationary episodes are often a precursor to economic
and political instability given that inflation acts as a tax on the less well-off members of a society. We
recognize that high inflation erodes confidence in the function of a domestic currency as a store of
value. This has contributed to capital flight and to currency and balance-of-payments crises.
A deflationary environment also reflects adversely on a central bank’s capabilities. Hence, deflationary
developments – which typically go along with subdued or negative real growth and an increase in the
debt-to-GDP ratio – are also credit-negative.
Thus, the credibility of a central bank or monetary authority is a key element in ensuring financial and
economic stability. For this sub-factor of the institutional framework and effectiveness, we typically
assess the inflation track record.
Another aspect of policy effectiveness is an assessment of the scope and capability of central banks to
intervene in the financial system during a crisis. We believe that a low-inflation environment allows
greater flexibility for a central bank to intervene in a time of economic stress. This was demonstrated by
the extraordinary expansions of major central bank balance sheets in response to the 2008 global
financial crisis.
» Inflation Volatility: This indicator adds another dimension to inflation performance and offers additional
insight into the Institutional Strength of a country’s central bank. Inflation volatility is associated with a
high degree of monetary policy uncertainty and an inability of the central bank to control inflation,

either because of structural economic features, institutional shortcomings, or widespread price

indexation.
c. Adjustments to Factor Score
» A government’s ‘track record of default’
The negative impact on the overall score depends on our expectations around the risk of re-default,
how recent the default was and the amount of loss imposed on investors. For example, while we
would not likely consider defaults that have occurred more than 20 years ago, a default within the last
20 years that resulted in a loss of up to 20% would typically result in a negative adjustment of one
notch, while a serial defaulter would typically receive the maximum negative adjustment of three
notches, regardless of the recovery rate observed. The use of the adjustment factor is based on the
observation that re-default risk is elevated for sovereigns: we find that sovereign bond restructurings
provide liquidity relief but often fail to provide solvency relief as they are frequently not accompanied
by a reduction in debt levels. As a result, we would expect a sovereign’s rating to typically remain in
the Caa-Ca territory for a period of time (i.e. sovereign rating upgrades shortly after a default are rare).
» Other adjustments to Factor Score
- WGI data considerations
We may conclude that the Worldwide Governance Indicators misrepresent a country’s Institutional
Strength. That may be because those measures tend to be backward looking. As a survey of surveys
they can be inconsistent and opaque, and a small number of survey data points for an individual
country may skew its results. Where our own experience and expectations, either of the predictability
and resilience of a country’s institutions or of the effectiveness of its policy framework and
policymakers, differ from that implied by the WGI scores, we may assign a Factor Score which differs
materially from that implied by the metrics.
In particular, we take into account the institutional constraints to which small economies are
subjected. Small economies can be vibrant and wealthy – a number of small economies are at middle-
to high-income levels. However, over the long-term, their policy effectiveness is inevitably constrained
by limitations on human capital (i.e. the small population) and their institutional capacity may be
weaker than their income level and indicators such as the WGI would suggest. Where a country’s
population is quite small, it is more likely that key individuals and institutions will be generalists with
relatively broad mandates; it is unlikely that the degree of expertise and specialisation available to a
large country can be replicated in a small one. WGI scores for very small economies are also often
based on a much smaller number of surveys than what we would see in a larger economy, which may
skew the overall WGI scoring. Each small economy is assessed based on its own circumstances.
Overall, we tend to assign lower F2 scores for such countries than would be implied by WGI scores to
reflect our view of the weaker institutional capacity that is often inherent in smaller states.
- Other considerations for policy effectiveness
Not all countries operate their own monetary policy. That may be because they operate a foreign
exchange peg or are ‘dollarized’. In such cases, inflation performance is a weak guide to the quality of a
country’s own institutions, and our assessment may be informed by other measures of policy
effectiveness. Indeed, more broadly, inflation is only a proxy, and for each sovereign we look more
broadly at policy outcomes and the responsiveness of governments to changing circumstances. In
particular, the quality of fiscal policy implementation, including the use of and adherence to fiscal
rules, is an important aspect of policy effectiveness that may lead us to adjust the score for policy
effectiveness to be materially different than the score indicated by standard scorecard metrics.

Additional adjustment factors may be considered in our assessment of Institutional Strength over time
if we find that another indicator can provide a universally high degree of explanatory value for
Institutional Strength.
Factor 3: Fiscal Strength

EXHIBIT 11

Economic Resiliency
Why it matters
The third factor, Fiscal Strength, captures the overall health of government finances. The starting point of
our analysis is to assess relative debt burdens (debt/GDP, debt/revenues) and debt affordability (interest
payments relative to revenue and GDP). From there, we take into account the structure of government
debt. Some governments have a greater ability to carry a higher debt burden at affordable rates than others.
More than a third of sovereign defaults have occurred as a result of persistent external and fiscal imbalances
which have, over time, built up an unsustainably high debt burden. These defaults were typically
characterized by a slow build-up of debt, a dependence on external creditors, and/or a deterioration in debt
affordability in particular (which is much better correlated with past default experience than debt-to-GDP)
over many years, as a result of external terms-of-trade shocks or unsustainable government fiscal policies.
The defaults themselves occurred at very high debt-to-GDP and debt burden levels, which countries were
ultimately unable to service or reduce. The defaults of Pakistan in 1998, Moldova in 2002, Dominica in
2003, Grenada in 2004, Belize in 2006, the Seychelles in 2008, Jamaica in 2010, and most recently Greece
in 2012 and Jamaica in 2013 are all examples of fiscal and external imbalances building up over time that
eventually lead to large debt burdens which in turn created significant exposures to further shocks.
The dynamic aspect of the analysis of a government’s Fiscal Strength is covered in the adjustment factors.
Our debt sustainability analysis involves anticipating future trends and events based on available
information. Our assessment is informed by current measures and recent trends, including in relation to the
sovereign’s debt burden, fiscal policy and the GDP growth rate. The analysis may consider a range of future
scenarios with respect to nominal growth, fiscal trajectories, interest rate developments, and other risk
factors that could cause meaningful variations in future credit strength. We also take into account both
contingent liabilities and financial assets.

EXHIBIT 12
Indicator
Broad Sub-factor Weighting
Rating Rating Sub- Weighting (towards
Factors Factor (towards Factor) Sub-Factor Indicators Sub-Factor) VH+ VH VH- H+ H H- M+ M M- L+ L L- VL+ VL VL-
Debt Burden1 50% General Government 50% < 30 30- 35- 40- 45- 50- 55- 60- 65- 70- 80- 90- 100- 120- ≥ 140
Debt/GDP (%) 35 40 45 50 55 60 65 70 80 90 100 120 140
General Government 50% < 120 120- 140- 160- 180- 200- 220- 240- 260- 280- 320- 360- 400- 480- ≥ 560
Debt/Revenues (%) 140 160 180 200 220 240 260 280 320 360 400 480 560
Debt 50% General Government 50% <6 6-7 7-8 8-9 9-10 10-11 11-12 12-13 13-14 14-16 16-18 18-20 20- 24- ≥ 28
Affordability1 Interest 24 28
Payments/Revenue (%)
General Government 50% < 1.5 1.5- 1.75- 2- 2.25- 2.5- 2.75- 3- 3.25- 3.5-4 4-4.5 4.5-5 5-6 6-7 ≥7
Interest Payments/GDP 1.75 2 2.25 2.5 2.75 3 3.25 3.5
(%)
Adjustments to 0 - 6 scores max Debt Trend2 t-4 to t+1 0-3 < (12) (12)- (10)- (8)- (5)- (2)-0 0-2 2-5 5-10 10-15 15-20 20- 25- 30- ≥ 35
Factor 3: Factor Score** scores (10) (8) (5) (2) 25 30 35
Fiscal
Strength 0* 0 0 0 0 0 0 0 0 -1 -1 -2 -2 -3 -3
General Government 0–6 0-0.5 0.5-1 1-2 2-4 4-6 6-8 8-10 10-15 15-20 20- 25- 30- 40- 50- ≥ 60
Foreign Currency scores 25 30 40 50 60
Debt/General
Government Debt (%) 0* 0 0 0 0 0 0 0 0 -1 -2 -3 -4 -5 -6
Other Public Sector Debt 0–3

scores
Public Sector Financial 0–4
Assets or Sovereign scores
Wealth Funds
Other 0–6
scores
1
For reserve currency countries, the weights of Debt Burden and Debt Affordability are 10% and 90%, respectively, while for HIPC and IDA countries, the weights are 100% and 0%, respectively. A reserve currency is a currency
that is held in significant quantities by central banks as part of their foreign exchange reserves. Japan, Switzerland, United Kingdom and the US are reserve currency countries. Whereas the euro is seen as a reserve currency, only
Germany and France as the two largest member states have the extent of influence over the ECB’s monetary policy to support analysis as ‘reserve currencies’. HIPC stands for Heavily Indebted Poor Countries which are eligible
for special assistance from the IMF and World Bank. IDA countries are countries supported by the International Development Association, the World Bank’s Fund that provides loans and grants for the world’s poorest countries.
2 Calculated as the percentage point change in General Government Debt/GDP between t-4 and t+1. Although negative adjustments are automatically applied to rising debt burden, positive adjustments made for a declining debt
trend may be applied based on our overall forward-looking view of the materiality and sustainability of the decrease in debt burden, rather than on a formulaic approach.
* Numbers correspond to the automatic negative adjustment applied for an increasing debt trend (in “scores”) and the exposure to FC debt to arrive at the Indicative Factor Score.
** Numbers in parenthesis denote negative numbers.

We score the following specific indicators:

a. Debt burden
» General Government Debt/GDP: This ratio is the starting point of our assessment of Fiscal Strength. We
recognize that the level of debt alone does not determine whether a sovereign will face default: indeed,
while past instances of sovereign defaults have been correlated with rising debt burdens, a high debt-
to-GDP ratio is neither a necessary nor a sufficient condition for sovereign default. Nevertheless, it is a
useful starting point. The ratio considers the gross debt, including direct debt of the central government
and all regional and local governments (collectively, General Government Debt). In the case of federal
systems with a division of fiscal responsibilities, we separately analyse central government debt.
» General Government Debt/Revenues: This ratio gives a rough indication of the repayment capacity of
the sovereign’s actual revenue base. A high ratio, however, may reflect legacy fiscal weaknesses or the
fiscalization of contingent liabilities which previously had no claim on government revenues to service
debt. Such a situation will force a government to tighten fiscal policy and reduce its deficit. Otherwise,
debt accumulation will disproportionally burden future generations of taxpayers.
b. Debt affordability
» General Government Interest Payments/Revenue: This ratio indicates the degree to which a
government’s debt service burden is within its revenue-generation capacity. It also reflects the
willingness of its creditors to finance government deficits with or without demanding a risk premium. A
high ratio means that a large share of revenues will be diverted to meeting interest payments. The
implications are both fiscal and economic. A large interest burden will not only tend to result in
relatively large fiscal deficits, but it will also constrain public-sector capital expenditure in the budget.
The latter has negative implications for long term economic growth.
» General Government Interest Payments/GDP: This ratio expands upon the debt service-to-revenue
analysis beyond the immediate capacity of fiscal revenues to the broader capacity of national income
and output to meet government debt service requirements.
c. Adjustments to Factor Score
The factor adjustments are more numerous for Fiscal Strength, reflecting the relative complexity of the
issue of debt sustainability. They are:
» Debt Trend: The debt trend, as captured by the percentage point change in the debt level compared to
GDP over a period of time, offers a retrospective and prospective look at the medium-term debt
trajectory. A declining trajectory may result in a positive adjustment to the Fiscal Strength scoring if it
is material and sustainable, while a rising trend results in a negative adjustment. The adjustment is
asymmetric in part because a trend of rising debt is more likely to be sustained. Governments promote
economic stimulus in ways that increase debt much more often than they impose austerity measures,
and increasing debt-servicing requirements themselves add to budgetary pressures that may increase
debt levels. Debt-reduction programs are typically relatively short-lived and declining debt trends are
more likely to plateau or reverse than increasing debt trends.
In our approach, recent trends that empirically indicate fiscal performance are supplemented with a
judgement of future fiscal performance. There are several instances of sovereigns whose favourable
past and expected debt trends have driven rating upgrades despite relatively high debt burdens at some
point in their recent history.
» General Government Foreign Currency Debt: One of the hallmarks of sovereign default is a high
proportion of foreign-currency-denominated debt. Our 2010 sovereign default study found that, on
average, foreign currency-denominated debt made up approximately three quarters of government
debt for the 20 sovereigns covered in the year prior to default. This reflects the “original sin”
phenomenon, wherein a sovereign must rely on external creditors because its domestic capital market

is too shallow. Moreover, macroeconomic or balance-of-payments shocks, or both, can lead to a

currency crisis and large depreciation, which increase both the debt-servicing costs and debt burden of
a sovereign in local currency terms. High system-wide external debt is also a hallmark of sovereigns
which have defaulted on foreign currency debt, as was the case of Moldova and Uruguay in 2002 and
2003, respectively.
Our assessment of the implications of a stock of foreign currency debt for a sovereign’s Fiscal Strength
assessment is both qualitative and quantitative. We consider the extent to which associated foreign
exchange risk is mitigated, for example, through financial hedges. We also take into account the overall
size of the government’s debt burden. For instance, it would be very unusual for a sovereign’s Fiscal
Strength score to be lowered by more than three notches if its General Government Debt to GDP is
less than 25% of GDP, given the limited vulnerability to adverse currency movements at such low debt
levels. For higher ratios, the negative adjustment can be as much as 6 scores.
Where an economy is identified as entirely ‘dollarized’ we essentially disregard the ostensibly negative
credit impact of debt issuances denominated in the adopted currency, on the grounds that the foreign
currency is the de facto local currency.
We will not do this where the value of the local currency and that in which debt tends to be issued is
simply ‘fixed’ through fixed exchange regimes or pegs. Experience suggests that such regimes are
susceptible to pressures arising in precisely the same circumstances – for example domestic economic
dislocation – as would generally be expected to expose the vulnerability to which foreign currency debt
issuance exposes sovereigns. Thus, the currency peg does not preclude a downward adjustment
However, where currency pegs have been maintained over many decades and where we have no
reasonable expectation that economic, fiscal, or other pressures could destabilise these pegs over our
rating horizon, we will offset somewhat any adjustment we would otherwise make to reflect high levels
of foreign currency debt issuance. As always, our assessment will reflect the circumstances facing
particular issuers.
» Other Public Sector Debt: Weak public sector companies can drain fiscal resources from the central
government and eventually lead to a fiscalization of debt which was previously a contingent claim. The
greater the pressures faced by the non-financial public sector, the more likely the fiscalization of debt
among public-sector companies.
» Public-Sector Financial Assets or Sovereign Wealth Funds (SWFs): The deployment of sovereign wealth
fund assets can support government finances where those assets are both liquid and highly
creditworthy. We do not place much weight on the utility of other government assets as a mitigant to
the debt burden, given the risk that they become illiquid or lose value during an economic crisis
(though we will sometimes recognise the potential for sales of real estate assets to support Fiscal
Strength where planned sales are at an advanced stage, with investors identified). Nor do we place
much weight on assets owned by social security or public pension systems, deployment of which
generally simply replaces one liability with another. Thus, the focus of our analysis remains on gross
debt, not net debt.
Our approach is to provide less uplift for SWFs with extremely limited transparency and for SWFs
which primarily invest domestically in assets that could prove illiquid in times of stress. If the level of
transparency is extremely poor, with the total size of SWF assets unavailable and uncertainty around
the size, we haircut the size estimates – typically by 50%. We also deduct the SWF’s domestic assets
from its total assets. Domestic assets do not provide the same kind of fiscal buffer as foreign assets,
since SWFs with large domestic holdings generally invest in domestic SOEs and infrastructure projects
that aim to develop the domestic economy (more akin to development banks or strategic funds).
Domestically held assets are also more likely to lose value or become illiquid in times of sovereign
stress. Finally, where the SWF issues debt we net out borrowings from assets.
These are not hard and fast guidelines, and the actual degree of adjustment is applied on a case-
specific, forward-looking basis taking into consideration other information relevant to how the SWF or
other liquid reserves mitigate the sovereign’s debt burden.

As an example, some countries have substantial cash reserves, which are not included in the SWF data
and do not trigger an automatic adjustment. On an exceptional basis, we may treat cash or liquid funds
as, in effect, SWFs. Examples might include domestic cash funds, bond reserve funds or sinking funds;
domestic liquid fiscal reserve funds whose holdings of government bonds are not already netted out as
part of the calculation of consolidated government gross debt; and foreign exchange funds which are
not already captured in reported foreign exchange reserves or in the SWF adjustment.
We would only generally do so where the cash reserve fund was unusually large compared to other
sovereigns (i.e., over 10% of debt); had been in existence for at least 5 years; was subject to a clear
government policy of managing the cash/liquidity fund to maintain the unusually large balances going
forward; and was not already captured in the calculation of consolidated government gross debt, or as
SWF adjustment, or in reported foreign exchange reserves.
Having performed our adjustments to arrive at Net SWF Assets, the amount of uplift provided by the
SWF rises according to its size in relation to debt. In the scorecard, Net SWF Assets exceeding 10% of
outstanding government debt lead to an uplift to Fiscal Strength of one score; Net SWF Assets
exceeding 50% lead to an uplift of two scores; Net SWF Assets of more than 100% of debt outstanding
lead to three notches of uplift, and the maximum uplift of four notches is applied to exceptionally large
SWFs (> in excess of 500% of debt). 5
Additional adjustment factors may be considered in our assessment of Fiscal Strength over time if we find
that additional indicators can provide a universally high degree of explanatory value for Fiscal Strength.
Factor 4: Susceptibility to Event Risk

EXHIBIT 13

Economic Resiliency
5 In cases where the Fiscal Strength factor score is already high, the impact of the upward SWF adjustment may be limited, since the score cannot exceed VH+.

Why it matters
The last factor to consider is a country’s Susceptibility to Event Risk. While the first three rating factors –
Economic Strength, Institutional Strength and Fiscal Strength – are aimed at assessing the government’s
ability to withstand shocks from a medium-term perspective, this fourth factor denotes the risk that sudden,
extreme events may severely strain public finances, thus sharply increasing the sovereign’s probability of
default.
Our analysis of past sovereign defaults highlights the importance of shocks such as banking crises and
foreign-exchange crises. A meaningful number of past sovereign defaults have occurred as a result of
systemic banking crises, in which costly bank restructuring contributed to a large and sudden build-up of
public debt over a couple of years in the aftermath of the banking crisis. The defaults of Ecuador in 1999,
Uruguay in 2003, Nicaragua in 2003 and the Dominican Republic in 2005, and more recently Cyprus in
2013 are examples of this dynamic. Meanwhile, in addition to the instances of a banking crisis as the
underlying cause for default, an even greater number of past sovereign defaults also eventually culminated
in banking crises. Capital outflows can also trigger a currency crisis, with a spike in the External Vulnerability
Indicator ratio (described below) reflecting the increased cost of servicing foreign-currency debt in the wake
of currency depreciation. Two of the largest sovereign defaults in history and the most severe in terms of
both the disruption to the economy and the losses incurred by investors – the Russian default of 1998 and
the Argentinean default of 2001 – are examples of ‘triple’ crises: i.e. a combination of simultaneous debt,
banking and currency crises.

EXHIBIT 14
Indicator
Weighting
Broad (towards
Rating Rating Sub-Factor Sub- Indicator
Factors Sub-Factor Indicators Factor) Components VH+ VH VH- H+ H H- M+ M M- L+ L L- VL+ VL VL-
Political Domestic Political Max. Worldwide Voice <5 5-25 ≥ 25
Risk Risk Function** and
Accountability
Index (Percentile)
GDP per capita <5 5-25 ≥ 25
(Percentile)
Geopolitical Max.
Risk Function**
Government Fundamental 50% Gross Borrowing ≥ 40 37.5-40 35-37.5 32.5-35 30-32.5 27.5-30 25-27.5 22.5-25 20-22.5 17.5-20 15-17.5 12.5-15 10-12.5 5-10 <5
Liquidity Metrics Requirements/
Risk GDP (%)***
Non-Resident ≥ 95 90-95 85-90 80-85 75-80 70-75 65-70 60-65 55-60 50-55 45-50 40-45 35-40 30-35 < 30
Share of General
Government
Debt (%)***
Market Funding 50% Moody’s Market Caa3-C Caa2 Caa1 B3 B2 B1 Ba3 Ba2 Ba1 Baa3 Baa2 Baa1 A3 A1-A2 Aaa-
Factor 4: Stress Implied Ratings Aa3
Susceptibility Banking Strength and 80% Average Baseline caa3-c caa2 caa1 b3 b2 b1 ba3 ba2 ba1 baa3 baa2 baa1 a3 a2 a1-aaa
to Event Risk Sector Risk Size of Banking Credit Assessment
System (BCA)***
Total Domestic ≥ 195.65 165.48- 131.95- 120.15- 108.62- 97.62- 91.05- 87.04- 76.08- 65.94- 60.84- 54.57- 49.33- 39.17- < 39.17
Bank Assets/GDP 195.65 165.48 131.95 120.15 108.62 97.62 91.05 87.04 76.08 65.94 60.84 54.57 49.33
(%)***
Funding 20% Banking System ≥ 260 250-260 225-250 200-225 180-200 160-180 140-160 120-140 100-120 90-100 80-90 70-80 60-70 50-60 < 50
Vulnerabilities Loan-to-Deposit
Ratio (%)
External (Current Account 25% (Current Account < (35) (35)-(30) (30)-(25) (25)-(20) (20)-(15) (15)-(10) (10)-(8) (8)-(6) (6)-(5) (5)-(4) (4)-(3) (3)-(2) (2)-(1) (1)-0 ≥0
Vulnerability Balance + FDI Balance + FDI
Risk Inflows)/GDP Inflows)/GDP (%)
External 50% External ≥ 400 300-400 250-300 200-250 180-200 160-180 140-160 120-140 100-120 90-100 80-90 70-80 60-70 50-60 < 50
Vulnerability Vulnerability
Indicator (EVI) Indicator (EVI)
Net International 25% Net International < (350) (350)-(300) (300)-(250) (250)-(200) (200)-(150) (150)-(100) (100)-(75) (75)-(50) (50)-(25) (25)-0 0-10 10-20 20-30 30-40 ≥ 40.0
Investment Investment
Position Position/GDP (%)
* Numbers in parenthesis denote negative numbers.

** The aggregation of Domestic Political Risk and Geopolitical Risk follows a maximum function, i.e. as soon as one area of risk warrants an assessment of elevated risk, the country's overall Susceptibility to Political Risk is scored at that specific, elevated level.
*** The aggregation of Gross Borrowing Requirements/GDP(%) with Non-Resident Share of General Government Debt (%) and the aggregation of Average Baseline Credit Assessment (BCA) with Total Domestic Bank Assets/GDP(%) follows a minimum function,
i.e. the less risky indicator component is used to evaluate the respective sub-factor indicator.

Factor 4 analysis comprises four areas of event risk: Political Risk, Government Liquidity Risk, Banking Sector
Risk and External Vulnerability Risk. Generally speaking, the Susceptibility to Event Risk weighs the
probability of the event by its severity in terms of its impact on a sovereign’s creditworthiness. The
aggregation of the four rating sub-factors of event risk uses a maximum function as the materialization of
even one of these risks can lead to a severe deterioration of a sovereign’s credit profile. 6
POLITICAL RISK
We focus on two dimensions of Political Risk: risks that arise from domestic politics and political instability,
and risks that are geopolitical. Both kinds of Political Risk may increase a country’s probability of default.
The Political Risk score is typically the maximum of the two sub-scores on Domestic Political Risk and
Geopolitical Risk; however, in some cases the two risks, domestic political and geopolitical, reinforce each
other, leading to a level of risk that is higher than either of the individual scores.
» Domestic Political Risk: Domestic Political Risk is assessed on the basis of two main indicators: the
World Bank’s Voice and Accountability index, and GDP per capita (as a proxy for the potential of low
income-related social unrest). This is a two-indicator grid that is only a starting point of the analysis in
cases that involve political factors that go beyond this framework, and we may adjust the score to
reflect our forward-looking view of domestic political risk based on the country’s specific situation.
» Geopolitical Risk: Geopolitical Risk is scored based on an overall qualitative assessment of relevant
circumstances affecting the country. For example, a country’s credit standing may be influenced by
unresolved political and or military issues with a neighbouring country, especially one with a bellicose
foreign policy. An escalation of tensions between countries or the potential for a failure in the
sovereignty of a neighbouring state could weigh on the creditworthiness of a country. There have been
very few countries whose creditworthiness has been significantly affected by geopolitical risk concerns.
GOVERNMENT LIQUIDITY RISK

Government Liquidity Risk reflects the risk that a sovereign issuer lacks the liquidity to service its debt. All
things being equal, countries that have access to a deep and diversified pool of finance are in a better
situation than those whose private savings are low and whose financial system is less developed. Moreover,
benefiting from a captive set of local investors mitigates liquidity risk. A country with debt largely held by
resident banks, companies and individuals has greater ability to manage liquidity risk via monetary and fiscal
policy.
Although solvency and liquidity are expected to converge in an equilibrium situation, some sovereigns are
more vulnerable to liquidity risk than others. In the scorecard, Government Liquidity Risk is captured by a
combination of fundamental metrics and an assessment of market funding stress.
» Fundamental Metrics: Gross Borrowing Requirements relative to GDP depict the size of the sovereign’s
funding needs: with all else being equal, the larger the borrowing requirements, the higher the
sovereign’s susceptibility to liquidity risk. The share of the General Government Debt that is held by
non-residents is also an instructive indicator in times of market stress: 7 the higher the share of foreign
investors, the less captive the sovereign’s investor base, and hence the higher its liquidity risk.
» Market Funding Stress: Moreover, funding stress on a government’s bond market reflects elevated
liquidity risk for the respective sovereign. Market-based measures of default risk (such as CDS prices or
bond-implied ratings) are informative indicators in this regard. The euro area debt crisis – in which
sovereigns with large funding needs and significant dependence on foreign investors came under
pressure – confirmed our view that intermittent funding stress reflects adversely on a sovereign’s
creditworthiness.
6 Note that, for the first three factors, the 15 scoring categories refer to intrinsic strength; thus, Very High Plus (VH+) is the best score. For Factor 4, the scores refer to the
level of risk; thus, Very Low Minus (VL-) is the best score.
7 In periods of benign credit market conditions, a broad and diversified investor base can be a credit-supportive feature, facilitating a sovereign’s market access and
lowering its costs of funds. However, only established ‘safe havens’ can count on such a diversified investor base to exist during periods of credit market dislocations.

Acute market funding stress can be mitigated by support from other sovereigns through bilateral or
multilateral loans. Such support can also be provided by regional or globally operating supranational
organisations such as the IMF or the European Stability Mechanism (ESM). To the extent such loans
provide relief from immediate funding stress, they are typically a mitigating factor in terms of a
sovereign’s Susceptibility to Event Risk and may lead to a sub-factor adjustment.
Nonetheless, the activation of a conditional support programme is generally a sign of significant
fundamental credit weakness and heightened default risk. Many countries enter support programmes
when they are in distress and support is often a last-resort crisis measure. Participation in an IMF
support programme for example has been correlated with the presence of elevated long-term credit
vulnerabilities – during the 1983-2012 period, 16.4% of all sovereigns that entered IMF programmes
defaulted over a five-year horizon. This historical default rate is consistent with our practice of generally
maintaining non-investment grade ratings on countries in support programmes.
BANKING SECTOR RISK AND OTHER CONTINGENT LIABILITIES

Contingent liabilities (CLs) are off-balance sheet liabilities that may migrate onto the government’s balance
sheet depending on the occurrence of specific events. Our assessment of contingent liabilities centres on
identifying their scope, estimating their size, and evaluating their risk of materialisation. The numeric
indicators in the scorecard focus on banking sector contingent liabilities, which in our view generally pose
the greatest threat to sovereign credit profiles and where data are generally more readily available.
However, our analysis will take into account any material contingent liabilities that we identify (other than
liabilities arising from other public sector liabilities, which are captured in Factor 3).
Explicit government guarantees to cover the debt repayments of third parties are the most common form of
CLs, as the government has a contractual commitment to pay if a particular clause is triggered. However,
our definition extends beyond explicit guarantees, and encompasses the liabilities of all those entities that a
government might feel compelled to support so as to maintain them as a going concern; for most countries,
this applies in particular to the banking system and government-owned or related companies. In some
countries, the propensity to support will extend even beyond publicly-owned corporations, e.g., if a (private)
company is deemed to perform a vital activity for the country or employs an important share of the
country’s workforce.
The track record of a government in providing support to other entities in the country plays an important
role in determining its perimeter of contingent liabilities. Strictly speaking, government finances and the
level of public debt are only affected once contingent liabilities crystallize. Then, the immediate effect will
depend on what form the government intervention takes and how it is funded. For instance, the recourse to
new borrowing will increase the government’s gross debt. In contrast, the government’s budget deficit will
only be impacted if the support takes the form of a subsidy, or any other non-financial transaction.
For banks, we note that government support has usually taken two forms: (1) the issuance of guarantees to
facilitate bank debt issuance and other temporary liquidity support measures; and (2) direct injections of
capital. In our analysis, we focus on the latter, as it is our view that governments will ultimately choose to
recapitalize banks in need rather than run the financial and reputational risks of having guarantees being
called. In order to calculate the size of contingent liabilities arising from the banking sector we use the
analysis that we perform to assess the capital replenishment needs of each rated bank, using different
scenarios for asset quality deterioration and target capital ratios. For the purposes of our analysis of
sovereign contingent liabilities, we consider the aggregate potential capital needs of all rated banks and
extrapolate to the entire banking system as appropriate for countries with sizeable unrated banks. As part of
our analysis, we also consider the possibility that a government may choose to ‘ringfence’ its balance sheet
and impose losses on private sector creditors as a means of recapitalizing a bank or banks in distress.
Government support to government-related issuers (GRIs) has mainly taken the form of financial transfers
to refinance maturing debt or to financially support a restructuring plan, following a sharp deterioration in
the corporation’s financial metrics. Therefore, we consider a GRI’s gross financial debt as an appropriate

proxy to assess the size of contingent liabilities arising from these entities 8. We then combine the estimates
from the banking and the corporate sectors to arrive at an estimate for the gross contingent liabilities for
each sovereign.
Besides the size of a government’s contingent liabilities, we also take into account how likely these potential
liabilities are to transform into actual liabilities and the impact on debt levels. We believe that the likelihood
of a crystallization of CLs is primarily driven by two factors: (1) the stand-alone credit quality of the banks
and GRIs in the country and (2) the willingness of a government to support the entities in case of stress. Put
simply, a country with many lower-rated banks and GRIs coupled with a government that has historically
provided substantial support to a large segment of the economy is one with a high likelihood that some
level of contingent liabilities will crystallize on the government’s balance sheet.
Banking sector liabilities usually represent the key contingent liability for the sovereign. In this context, a
sovereign is susceptible to financial events that may lead to a crystallization of banking sector liabilities on
its balance sheet.
» Strength of the Banking System: The strength of a banking system is measured by the system’s average
Bank Baseline Credit Assessment (BCA). BCAs represent Moody’s opinion of a bank’s intrinsic safety and
soundness. BCAs do not take into account the probability that the bank will receive external support,
nor do they address risks arising from sovereign actions that may interfere with a bank’s ability to
honour its domestic or foreign currency obligations. BCAs are intended to provide a globally consistent
measure of a bank’s financial condition before considering external support factors that might reduce
default risk. Thus, we compare countries’ average BCAs for a consistent indication of banking system
intrinsic financial strength.
However, in some very specific circumstances, we may conclude that an adjustment to the Strength of
the Banking System score is warranted. These circumstances include:
- Where bank rating coverage is very limited we may adjust our assessment of the strength of the
sector up or down depending on whether we believe the unrated sector is materially stronger or
weaker than the rated sector.
- Where the average BCA for the system as a whole disguises credit concerns in a material part of
the system. For example, where the weighted average BCA incorporated BCAs assigned to a small
number of strong, international banks, and understated the risk posed to the sovereign by a larger
number of small, lower quality banks with much lower BCAs, we would typically make an
adjustment to reflect the higher risk.
- Where the banking system is predominantly foreign-owned and the parent banks have a high
propensity to support branches or subsidiaries in other jurisdictions. This lowers contingent
liabilities to the government, which can lessen the pressure on banking sector event risks to the
host country, which may be reflected in an adjustment to the score.
Where we do not rate banks in a system, we use available data and our judgment in estimating the
weighted average BCA. A BCA cannot be higher than the sovereign rating, as is indicated in our banking
methodology, and will generally be lower. Our starting point is generally to estimate that the weighted
average BCA is one or two notches below the sovereign rating. However, an analysis of banking sector
data could cause us to assign a BCA proxy that is multiple notches lower than the sovereign rating.
» Size of the Banking System: The size of a banking system is measured by the Total Domestic Bank Assets
relative to GDP 9. With all else being equal, the larger the banking system, the larger the contingent
liabilities for the sovereign. The combined score of the Strength of the Banking System (measured by
8 In countries with limited rating coverage of GRIs we follow the simplistic rule to fully include the financial debt of unrated GRIs in our calculations – assuming the
probability of crystallization is 100% unless we have clear evidence that the government would not support the GRI in question. In countries where Moody’s rates no
banks, the assessment of the risks stemming from potential contingent liabilities in the form of recapitalization needs is mostly qualitative and relies to an important
extent on the domestic financial supervisory authority’s analysis.
9 If data for total domestic bank assets is not available, we use total bank assets in our scorecard.

the average BCA) and the Size of the Banking System (measured by Total Domestic Bank Assets relative
to GDP) is aggregated in a way that reflects that a simultaneously weak and large banking system
represents a significant banking sector risk. 10
» Funding Vulnerabilities: Banking systems with a small deposit base and a significant reliance on
wholesale banking are more vulnerable than systems with a flexible depositor base and low
dependence on capital market funding. In this regard, the key metric we consider is a banking system’s
loan-to-deposit ratio: all else being equal, the higher this ratio, the higher the sovereign’s susceptibility
to banking sector risk.
» Other Contingent Liabilities: Contingent liabilities for sovereigns may arise from other areas of the
economy, for example from the need to provide support to public-private partnership schemes, or
outsized non-debt obligations in social policy areas such as health care or pensions. Our analytical
approach is similar for contingent liabilities regardless of the source and aims to capture both the size
of potential liability and the risk of its materialization onto the government’s balance sheet.
EXTERNAL VULNERABILITY RISK

For some countries, it is not sufficient to mobilize resources in local currency: to repay foreign-currency-
denominated debt; they need to take the extra step of obtaining hard currency in exchange for their local
currency funds. Countries that do not spontaneously generate hard currencies because they have a current
account deficit and/or net capital outflows experience a shortage of hard currency – and this is reflected in a
depreciating exchange rate and diminishing official foreign reserves. These countries are “balance-of-
payment-constrained,” irrespective of whether or not the government can easily mobilise local-currency
funding to repay the debt. A government may also constrain itself in terms of the use of the currency
exchange rate as an adjustment mechanism, for example by committing to a currency board.
The balance of payment constraint has two characteristics: (1) it is in addition to the primary constraint of
being able to generate the local-currency funding; and (2) it is not limited to the government’s action – for
example, the shortage of hard currency may originate in chronic current account deficits that have little to
do with fiscal policy, but will affect the government regardless. The most useful indicators here are those
that measure external financing strains: we take account of the current account balance and foreign direct
investment inflows relative to GDP, the External Vulnerability Indicator and the Net International
Investment Position relative to GDP.
» Current Account Balance (CAB) and Foreign Direct Investment (FDI): The CAB records all cross-border
transactions between residents and non-residents, including exports and imports of goods and services,
unilateral transfers (such as official grants and worker remittances), and flows of dividend and interest
payments on foreign assets and liabilities. The CAB is positive if receipts from abroad exceed payments
and negative if the reverse is the case. Hence, the CAB (when in deficit) gives an approximate indication
of how much net import of capital from the rest of the world a country requires to close the gap
between domestic savings and investments. Large and persistent current-account deficits can lead to a
build-up of external debt, unless the deficits are financed by FDI inflows or equity positions in local
companies.
» External Vulnerability Indicator (EVI): This ratio measures a sovereign’s relative capacity to use
immediately available international reserves to make debt payments, even if there is a complete refusal
of creditors to roll over debt that is due within a given year. The ratio is defined as the stock of official
foreign reserves at the end of year t-1 as the denominator, and the residual maturity short-term debt
(including original maturity short-term debt and principal payments on long-term debt) falling due in
year t in the numerator. Also included in the numerator are deposits in domestic banks by non-
residents with a maturity greater than one year (those below one year are already included as part of
short-term debt). This is included because, in a general run on the currency, depositors may attempt to
10 The scorecard applies a minimum function when aggregating the risks reflected in the Banking System Strength and Size indicators, whereby a weak but small banking
system poses limited risks, as does a large but strong system. Hence, for overall banking sector risk to increase, the least risky of the two indicators would need to
deteriorate.

withdraw longer-term deposits even if they have to pay a penalty to do so. The EVI thus measures the
capacity to withstand a (temporary) loss of investor confidence resulting from heightened risk
perception or a general liquidity squeeze. A high ratio can be a signal of vulnerability, resulting either
from excessive short-term debt or a serious bunching of repayments on long-term debt, possibly
exacerbated by insufficient reserves.
» Net International Investment Position (NIIP): The NIIP measures the difference between the market value
of a country’s foreign assets and that of its liabilities, relative to GDP. The NIIP serves as an indicator of
the sustainability of the country’s current account balance, and the potential for balance-of-payments
stresses to emerge. A positive number represents a net asset position, in other words a claim on non-
domestic obligors that protect against a balance of payments crisis and provide uplift to the current
account balance through the primary income balance. Conversely, a negative number represents a net
liability position, which heightens the country’s exposure to an external shock. The composition of NIIP
– and for example the distinction between equity and debt – can be as important as the overall net
position, as can the country’s role in the global financial system, and both may result in a sub-factor
adjustment if they are found to mitigate or exacerbate External Vulnerability Risk.
Limitations of the Scorecard and Other Rating Considerations

Accordingly, the rating factors in the scorecard do not constitute an exhaustive treatment of all of the
considerations that are important for sovereign bond ratings. In addition, our ratings incorporate
expectations for future performance. In some cases, our expectations for future performance may be
informed by confidential information that we can’t disclose.
The scorecard in this rating methodology represents a decision to favour simplicity that enhances
transparency and to avoid greater complexity that might enable the scorecard to map more closely to
actual ratings. Its purpose is to facilitate an understanding of the type and range of factors Moody’s takes
into account in assessing sovereign risk. Accordingly, the four rating factors in the scorecard may not in all
cases constitute an exhaustive treatment of the considerations that are important for a particular sovereign
rating, and the rating may differ from the scorecard outcome range. The use of supplementary adjustment
factors is an attempt to capture idiosyncratic country-specific factors which may not be universally available
or relevant. In addition, our ratings incorporate expectations around future metrics and risk developments,
which could lead to material variations compared to a scoring based on historical information. In some
cases, our expectations around future credit developments may be informed by confidential information
that we cannot publish or otherwise disclose. In other cases, we estimate future results based upon past
performance, sector trends, actions of other sovereigns, or other factors. In either case, predicting the future
is subject to the risk of substantial inaccuracy.
Ratings may consider additional factors that are difficult to measure or that have a meaningful effect in
differentiating credit quality only in some, but not all cases. While these are important considerations, it is
not possible to express them precisely in the rating methodology scorecard without making it excessively
complex and significantly less transparent. Ratings may also reflect circumstances in which the weighting of
a particular factor will be substantially different from the weighting suggested by the scorecard.

Moody’s Related Research
The credit ratings assigned in this sector are primarily determined by this credit rating methodology. Certain
broad methodological considerations (described in one or more rating or cross-sector rating methodologies)
may also be relevant to the determination of credit ratings of issuers and instruments in this sector.
Potentially related rating and cross-sector credit rating methodologies can be found here.
For data summarizing the historical robustness and predictive power of credit ratings assigned using this
credit rating methodology, see link.
Please refer to Moody’s Rating Symbols & Definitions, which is available here, for further information.
To access any of these reports, click on the entry above. Note that these references are current as of the
date of publication of this report and that more recent reports may be available. All research may not be
available to all clients.

Report Number: 1151027
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Moody's Investors Service (2018). Sovereign Bond Ratings (30 p.) [s.l.]: Moody’s Investors Service.

NOVEMBER 27, 2018 SOVEREIGN & SUPRANATIONAL

RATING METHODOLOGY Sovereign Bond Ratings

Mauro Leos +1.212.553.1947

Gene Fang +65.6398.8311

This report includes the following sections:

» About the Rated Universe: an overview of Moody’s sovereign ratings.

About the Rated Universe

About This Rating Methodology

Identification of the Key Rating Factors

This publication does not announce

2 NOVEMBER 27, 2018 RATING METHODOLOGY: SOVEREIGN BOND RATINGS

3 NOVEMBER 27, 2018 RATING METHODOLOGY: SOVEREIGN BOND RATINGS

1. Measurement or Estimation of the Key Rating Factors

2. Mapping Factors to the Rating Categories

3. Determining the Overall Grid-Indicated Outcome

Economic Institutional Fiscal Susceptibility to

Government Financial Strength

Government Bond Rating Range

4 NOVEMBER 27, 2018 RATING METHODOLOGY: SOVEREIGN BOND RATINGS

5 NOVEMBER 27, 2018 RATING METHODOLOGY: SOVEREIGN BOND RATINGS

L- Aa1 Aa2 Aa3 A1 A2 A3 Baa2 Baa3 Ba1 Ba2 Ba3 B1 B2 B3 Caa1

6 NOVEMBER 27, 2018 RATING METHODOLOGY: SOVEREIGN BOND RATINGS

Discussion of the Key Rating Factors

Moody’s sovereign risk analysis focuses on four broad factors:

7 NOVEMBER 27, 2018 RATING METHODOLOGY: SOVEREIGN BOND RATINGS

Factor 1: Economic Strength

Economic Institutional Fiscal Susceptibility to

Government Financial Strength

Government Bond Rating Range

8 NOVEMBER 27, 2018 RATING METHODOLOGY: SOVEREIGN BOND RATINGS

Adjustments 0 - 6 scores Credit Boom 0 - 3 scores

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The specific sub-factors and indicators that we score are:

The key indicators and proxies for growth dynamics include:

» Recent performance and medium-term outlook for real GDP growth;

d. Adjustments to Factor Score

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Our assessment has two aspects.

» Other adjustments to Factor Scores

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- Unusual concentration – commodities

- Large stocks of natural resources

12 NOVEMBER 27, 2018 RATING METHODOLOGY: SOVEREIGN BOND RATINGS

Factor 2: Institutional Strength

Economic Institutional Fiscal Susceptibility to

Government Financial Strength

Government Bond Rating Range

13 NOVEMBER 27, 2018 RATING METHODOLOGY: SOVEREIGN BOND RATINGS

* Numbers in parenthesis denote negative numbers.

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The specific indicators that we score are:

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either because of structural economic features, institutional shortcomings, or widespread price

» A government’s ‘track record of default’

» Other adjustments to Factor Score

- WGI data considerations

- Other considerations for policy effectiveness

16 NOVEMBER 27, 2018 RATING METHODOLOGY: SOVEREIGN BOND RATINGS

Factor 3: Fiscal Strength

Economic Institutional Fiscal Susceptibility to

Government Financial Strength

Government Bond Rating Range