SOVEREIGN AND SUPRANATIONALSECTOR IN-DEPTH 29 August 2016ContactsIrina Baron Asst Dir-Research Associate irina.baron@moodys.comXian Li 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 ReportLow Oil Prices Finally Weaken Mexicos Credit Risk Sentiment The dominant factor influencing investors perceptions of credit risk last week was news from the Federal Reserve meeting in Jackson Hole. On August 26, Fed Chair Janet Yellen indicated that the solid performance of the labor market and the outlook for economic activity and inflation have strengthened the case for a future rate hike. Oil prices also occupied investors attention. Prices of oil stayed under the previous weeks high of $49.12, set on August 19, driven in part by reports indicating Iraqi oil production rose in July and expectations of a further ramp up in Iraqi and Nigerian production. Additionally, the Energy Information Administration reported that US stockpiles of crude oil and petroleum products are at record highs. The price of oil closed at $47.29 per barrel on August 26.Latin American market-based measures of credit risk increased over the past week. The regions 1.84% average five-year Sovereign EDFTM (Expected Default Frequency)1 is almost five times greater than Europes (0.40%). The key drivers of the rise in sovereign credit risk in the region are Venezuela, Mexico, and Chile (see Exhibit 1). Amid increasing concerns that the nation wont be able to pay its debts, Venezuela continues to have the highest probability of default of any of the 70 sovereign entities in our data set. Other market based credit measures like CDS-implied and Bond-implied ratings for the Latin America region also remain elevated2. The regions average CDS-implied rating is Ba3, which is one and two notches below its average Moodys...
