SOVEREIGN AND SUPRANATIONALSECTOR IN-DEPTH 2 NOVEMBER 2015ANALYST CONTACTSIrina Baron Asst Dir-Research Associate irina.baron@moodys.comXian Li Senior 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 investmentopportunities 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 ReportEmerging Markets Sovereign Default Measures Diverge The combination of a prospective interest rate hike by the Federal Reserve in December, weaker Chinese demand, falling commodity prices, and the strengthening US dollar has lifted the probability of default for emerging market (EM) countries. The median EM five-year Sovereign EDF' (Expected Default Frequency) 1 , 2 metric has increased from 0.36% to 0.43% since the beginning of the year (Figure 1). However, if we analyze EM countries by their specific economic and political challenges, we observe a divergence in their respective Sovereign EDF measures. Figure 2 shows the change in default risk for each group of countries categorized by the specific challenges they face, including slower economic growth (e.g. China), a weak banking sector (e.g. Bulgaria), and external imbalances (e.g. South Africa).The average five-year Sovereign EDF measure for the EM group facing slower economic growth has increased since the beginning of October by 17%, driven primarily by the increase in Brazils Sovereign EDF measure from 1.70% on October 5 to 1.96% as of October 30. Countries such as China and Brazil have struggled with declining growth, as the former reported GDP growth of 6.9% in the third quarter last week, its slowest pace in six years. Similarly, Brazils government has repeatedly revised its 2015 GDP growth outlook lower, from 0.8% at the beginning of the year, to -1.7% in July, and to -3% most recently.Figure 1: Median Five-Year Sovereign EDF Measures of Emerging Market Countries vs US Dollar IndexMOODY'S ANALYTICS SOVEREIGN AND SUPRANATIONAL...
