What is a 'Sovereign Credit Rating'

A sovereign credit rating is the credit rating of a country or sovereign entity. Sovereign credit ratings give investors insight into the level of risk associated with investing in a particular country, including its political risk. At the request of the country, a credit rating agency will evaluate the country's economic and political environment to determine a representative credit rating. Obtaining a good sovereign credit rating is usually essential for developing countries in order to access funding in international bond markets.

BREAKING DOWN 'Sovereign Credit Rating'

Another common reason for obtaining sovereign credit ratings, other than issuing bonds in external debt markets, is to attract foreign direct investment. To give investors confidence in investing in their country, many countries seek ratings from the largest credit rating agencies like Standard and Poors, Moody's, and Fitch. A solid rating from one of these agencies can provide further transparency and demonstrate a country’s good standing. Smaller but still effective rating agencies include DBRS, China Chengxin, Dagong, and JCR. Subdivisions of countries may also issue sovereign bonds, which require rating; however, many major agencies exclude smaller areas, such as country regions, provinces, and municipalities.

Examples of Sovereign Credit Ratings

Standard and Poors gives a BBB- or higher rating for sovereign bonds they consider investment grade; below this (BB+ or lower), S&P deems the security speculative or ‘junk’ grade. In 2016, for example, Zambia was given a B grade (negative), while Abu Dhabi, UAE received a AA (stable). Fitch has a similar system and results. Moody’s considers investment grade bonds to be rated a Baa3 or higher, in their system. Those bonds, rated Ba1 and below are non-investment grade. In 2016, the Congo received Baa2 (non-investment grade), while Belgium was given AA3 (stable).

Sovereign Credit Ratings and Sovereign Credit Risk

Sovereign credit risk is related to its sovereign credit rating in that the risk portion highlights the potential for a government to become unwilling or unable to meet its debt obligations. Key factors that many investors look for when deciding how risky it might be to invest in a specific country or region include: its debt service ratio, growth in domestic money supply, its import ratio, and the variance of its export revenue, among other factors.

During the Great Recession in 2008 many countries – most notably, Greece – faced growing sovereign credit risk sovereign risk, stirring global discussions about bailing out entire nations if they were not able to repay their debts.

RELATED TERMS
  1. Sovereign Risk

    Sovereign risk is the risk that a central bank will impose foreign ...
  2. Sovereign Debt

    Sovereign debt is issued by the national government in a foreign ...
  3. Fitch Ratings

    An international credit rating agency based out of New York City ...
  4. Credit Rating

    A credit rating is an assessment of the creditworthiness of a ...
  5. Investment Grade

    Investment grade refers to bonds that carry low to medium credit ...
  6. European Sovereign Debt Crisis

    The European debt crisis refers to the struggle faced by eurozone ...
Related Articles
  1. Investing

    The Risks Of Sovereign Bonds

    Sovereign debt can play an important role in providing international diversification to individual investors.
  2. Investing

    An Introduction To Sovereign Wealth Funds

    Countries use sovereign wealth funds to stabilize their economies, but these investments can lack transparency.
  3. Retirement

    Why Your Pension Plan Has Sovereign Debt In It

    One type of security pensions tend to invest in is sovereign debt, or debt issued by a government.
  4. Insights

    How Countries Deal With Debt

    For many emerging economies, issuing sovereign debt is the only way to raise funds, but things can go sour quickly.
  5. Investing

    Top 4 International Treasury Bond ETFs (BWX, EMB)

    Learn about the top four international treasury bond funds that hold sovereign foreign bonds, which can be denominated in U.S. dollars and local currencies.
  6. Investing

    3 Best Japan Bond ETFs for 2016 (IGOV, ISHG, BNDX)

    Learn about the top three exchange-traded funds (ETFs) that invest in sovereign and corporate bonds issued by developed countries, including Japan.
  7. Investing

    ETF Flows: Emerging Markets Bond ETFs Shedding Assets (EMB, LEMB)

    Learn about the top three exchange-traded funds (ETFs) that invest in emerging market bonds and experienced large capital outflows as of March 4, 2016.
  8. Managing Wealth

    Evaluating country risk for international investing

    Find out how investing overseas begins with determining the risk of the country's investment climate.
  9. Insights

    Does A Junk Rating Reflect Russia's Fundamentals?

    Moody’s, like other credit rating agencies, has downgraded Russia’s sovereign debt rating to non-investment grade, but does this reflect Russia's economy?
  10. Investing

    Sovereign Wealth Firms To Slow U.S. Buys: BofA

    U.S buying by sovereign wealth investments could come to an end soon as they seek higher returns, according to Bank of America.
RELATED FAQS
  1. Revolving Credit vs Line of Credit

    Understand how to differentiate between a line of credit and a revolving credit account, their uses, and how both differ ... Read Answer >>
Trading Center