SOVEREIGN AND SUPRANATIONALSECTOR IN-DEPTH 27 JULY 2015ANALYST CONTACTSIrina Baron Asst Dir-Research Associate irina.baron@moodys.comXian Li 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 ReportEmerging Markets Sovereign Default Risk Rises In Challenging Economic Environment A host of challenges have increased the risk of default for Emerging Markets, which up until mid-2013 had gone through a period of growth and falling credit risk. Each EM country faces a specific set of difficulties, including slowing economic growth (e.g. China), a currency crisis (e.g. Venezuela), and political instability (e.g. Turkey and Ukraine). Moreover, the strengthening US dollar, the prospect of an interest rate hike by the Federal Reserve, and weakness in Chinese demand are lowering commodity prices and reducing exports from countries like Russia and Brazil. Emerging markets expected probability of default over a one-year time horizon, measured by median one-year Sovereign EDF' (Expected Default Frequency) 1 metrics, increased from 0.035% to 0.055% since the beginning of this month (see Figure 1) 2 .Countries that had previously boomed on cheap foreign money and unsustainable consumption growth like Turkey, South Africa, Thailand, Indonesia, Chile, and Peru have experienced an average increase of 42% in their one-year Sovereign EDF measure over the last three weeks. At the same time, the default risk of countries with fragile banking systems - like Hungary, Romania, and Bulgaria x has improved somewhat, declining by an average of 2%.FIGURE 1. MEDIAN ONE-YEAR SOVEREIGN EDF MEASURES OF EM COUNTRIES VS. US DOLLAR INDEXMOODY'S ANALYTICS SOVEREIGN AND SUPRANATIONAL2 27 JULY 2015 SOVEREIGN RISK REPORT : EMERGING MARKETS SOVEREIGN DEFAULT RISK RISES IN CHALLENGING ECONOMIC ENVIRONMENTOther market based...
