SOVEREIGN AND SUPRANATIONALSECTOR IN-DEPTH 21 December 2015ContactsIrina Baron Asst Dir-Research AssociateMAirina.baron@moodys.comXian Li 212-553-1404Senior Research AnalystMAxian.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 ReportFed Rate Hike Convulses Global Credit Risk; South Africa SlipsOn December 16, the US Federal Reserve Bank responded to the strengthening labor market and moderate expansion in economic activity by announcing a widely anticipated increase in the fed funds rate target from a range of 0% to 0.25% to a range of 0.25% to 0.5%. The first rate increase since 2006 signals the Feds rising confidence in continued growth for the worlds largest economy. However, the Fed also indicated that future increases would come slowly, potentially at a pace of about one percentage point a year over the next three years. While Fed officials predict that the economy will expand by 2.4% in 2016 and the unemployment rate will fall from its current 5% to 4.7%, the rate of inflation now remains near zero, and is expected to increase only gradually, potentially falling short of its unofficial 2% target in 2016. Federal Reserve Bank president Janet Yellen suggested that inflation is being suppressed by temporary factors that include lower oil prices, and that it will rise as job growth continues.In response, global market-based measures of credit risk were mixed this past week.Sovereign EDFTM (Expected Default Frequency)1credit measures improved in more than a third of the countries in our dataset. Morocco showed the sharpest one-week improvement in credit risk, with its one-year Sovereign EDF measure falling by 27%, followed by Turkeys and Chiles respective declines of 22% and 19%. However, as expected, countries more vulnerable to the strengthening US dollar and countries affected by depressed oil prices co...
