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.

  1. Sovereign Default

    Sovereign default is a government's failure to repay its debts. ...
  2. Sovereign Fund Of Brazil

    The Sovereign Fund of Brazil is a sovereign wealth fund for the ...
  3. Sovereign Bond

    A sovereign bond is a debt security issued by a national government ...
  4. Investment Grade

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

    The European debt crisis refers to the struggle faced by eurozone ...
  6. Corporate Credit Rating

    A corporate credit rating is an opinion of an independent agency ...
Related Articles
  1. Investing

    Sovereign Wealth Funds: An Introduction

    Here's how countries use sovereign wealth funds to stabilize their economies, though these investments can lack transparency.
  2. 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.
  3. 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.
  4. 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.
  5. Managing Wealth

    Evaluating Country Risk for International Investing

    Find out how investing overseas begins with determining the risk of the country's investment climate.
  6. Personal Finance

    The Power of Major Credit Rating Agencies

    The performance of major independent credit rating agencies is a controversial topic, particularly due to the strength of their influence.
  7. Personal Finance

    Credit Risk Analyst: Job Description and Average Salary

    Learn what credit risk analysts do every day and how much money they make on average, and identify the skills and education needed for this career.
  8. Investing

    BNDX: Vanguard Total International Bond ETF

    Learn about the Vanguard Total International Bond exchange-traded fund, which invests in investment-grade foreign, sovereign and corporate bonds.
  9. Investing

    The Debt Ratings Debate

    Lack of competition and potential conflicts of interest have called the value of these ratings into question.
  10. Investing

    An Introduction To Emerging Market Bonds

    The rewards associated with this fixed-income asset are significant, but so are the risks.
  1. What are the Benefits of Credit Ratings?

    Learn how credit ratings are an important tool for borrowers. Typically, the better your credit rating, the better the loan ... Read Answer >>
  2. What's the difference between a credit rating agency and a credit bureau?

    Learn how to differentiate between credit rating agencies and credit bureaus, two industries that distribute valuable risk ... Read Answer >>
  3. Is it possible to have a credit limit that’s too high?

    Avoid these pitfalls when working with high credit limits, and learn how to increase your credit score by increasing your ... Read Answer >>
  4. What are the biggest risks of fixed-income investing?

    Learn about the three biggest risks of bonds and other fixed-income investments. Find out more about related issues and learn ... Read Answer >>
Trading Center