SOVEREIGN AND SUPRANATIONALSECTOR IN-DEPTH 21 March 2016TABLE OF CONTENTSContactsGlenn Levine 1.212.553.9595Assc Dir-Sr Research Analyst glenn.levine@moodys.comXian Li 1.212.553.1404Senior Research Analyst xian.li@moodys.comABOUT CAPITAL MARKETS RESEARCHAnalyses from Moodys Capital Markets Research, Inc. (CMR) focus on explaining signals from the credit and equity markets. The publications address whether market signals, in the opinion of the groups analysts, accurately reflect the risks and investment opportunities associated with issuers and sectors. CMR research thus complements the fundamentally-oriented research offered by Moodys Investors Service (MIS), the rating agency.CMR is part of Moodys Analytics, which is one of the two operating businesses of Moodys Corporation. Moodys Analytics (including CMR) is legally and organizationally separated from Moodys Investors Service and operates on an arms length basis from the ratings business. CMR does not provide investment advisory services or products.View the CMR FAQ Contact the CMR team Follow us on TwitterMoodys Analytics markets and distributes all Moodys Capital Markets Research, Inc. materials. Moodys Capital Markets Research,Inc. is a subsidiary of Moodys Corporation. Moodys Analytics does not provide investment advisory services or products.For further detail, please see the last page.Sovereign Risk ReportBrazils Sovereign Risk Falls Even as the Economy FaltersMarket-based sovereign risk measures have, on average, trended lower in 2016. Of the 69 countries in our sovereign EDFTM (Expected Default Frequency)1 database, more than two-thirds have seen their EDF decline and most of the sovereign EDFs that did increase only rose by a basis point or two. Just five sovereign EDFs have risen by 10 basis points or more since the start of the year. The average sovereign has improved by 12 basis points since the start of 2016.South America is indicative of this trend, with all of the regions sovereigns improving since the start of the year. The two key drivers of the sovereign EDF the measure of investor risk aversion (known as the Market Sharpe Ratio) and the CDS spreads on government bonds have both moved to help lower EDFs in 2016.Exhibit 1: South American Sovereign EDF measuresBrazils sovereign EDF rose steadily across 2015, with the five-year EDF hitting a peak of 2.45% in September before finishing the year at 2.26%, with an implied rating of B2. Since then, Brazils market-implied sovereign risk profile has improved, with its implied rating now at Ba2, three notches higher. The five-year CDS spread has narrowed from 499 to 358 basis points since the start of the year. The Market Sharpe Ratio has also increased in 2016 (from 0.52 to 0.77), helping to lower the sovereign EDF.MOODY'S ANALYTICS SOVEREIGN AND SUPRANATIONAL2 21 March 2016 Sovereign Risk Report: Brazils Sovereign Risk Falls Even as the Economy FaltersExhibit 2Five-year CDS-impl...
