SOVEREIGN AND SUPRANATIONALSECTOR IN-DEPTH 1 February 2016ContactsIrina 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.In republication, South Africas Sovereign EDF measure, mentioned on page 2, was changed from 18% to 0.18%. In addition, the reason for the vulnerability of South Africas economy to the Fed rate hike was revised to the countrys persistent, although shrinking, current account deficit.Sovereign Risk ReportSovereign Default Fears Recede as the Fed Holds Off on Another Rate HikeOn January 27, the U.S. Federal Reserve Bank responded to global financial market turbulence by keeping its benchmark interest rate target unchanged between 0.25% and 0.5%. The Fed acknowledged that the U.S. economy has slowed, citing weaker exports and inventory investment, leaving investors questioning the likelihood of a rate increase at its next meeting in March. In response, market-based measures of sovereign credit risk were generally improved over the past week. The decline in Sovereign EDFTM (Expected Default Frequency)1 metrics, which measure the expected probability of default over a one year horizon, was especially notable in emerging market (EM) countries. Turkey, South Africa, and Indonesia countries with relatively large current account deficits and low currency reserves showed some of the sharpest declines in credit risk. The Sovereign EDF measure for Turkey, which received substantial capital inflows during the Feds quantitative easing programs, has declined from 0.18% to 0.13% over the past two weeks (See Figure 1). South Africa and Indonesias Sovereign EDFs followed suit with similar declines over the past fortnight, finishing the week at 0.22% and 0.11%, respectively.Exhibit 1Countries with Some of the Larg...
