Part 1: Intro to the Country Risk Intelligence and Surveillance Framework
The dramatic drop in oil prices has been shaking the energy sector for a while now. In fact, our research shows that around 50% of high yield defaulters are from that sector, and this percentage may increase further, especially as more and more previously arranged future options come close to their expiry date.
But what is the impact on oil-producing countries? How are entire economies affected by the current oil prices? And how does this affect their country risk and sovereign risk?
In this 2-Part Country Risk Video & Blog series, I will focus on the countries that were identified as “oil price losers” in a recent study by the IMF (International Monetary Fund), CIA and the CME Group -- each with a first order decline in GDP from anything between 1% for Bahrain to a staggering 25% for Libya.
Before we begin our look at these top “oil price losers,” I would like to introduce S&P Capital IQ’s Country Risk Intelligence and Surveillance Framework, which takes structural, market and event indicators and aggregates them into a composite country risk rank, something that is unique and highly valued in our industry.
This framework covers a large variety of 30+ different country risk indicators, of which we show only a few here. Indicators are separated into three groups. The first group is structural indicators, which measure long-term views of different types of country risk, ranging from sovereign default risk via Standard & Poor’s Ratings Services’ sovereign ratings to long-term country risk scores by S&P Capital IQ, which assess the ‘risk of doing business’ in a country. The second group is market indicators that contain daily changing information from the market including sovereign Credit Default Swap (CDS) spreads, foreign exchange rates or S&P Capital IQ’s country risk premia for credit exposure and equity investments. These premia are expressed in basis points and serve as benchmarks for the return on an investment abroad that is expected as a compensation for the systemic country risk that one faces with this investment.
The third group is ground truth indicators. These are based on geopolitical risk events that are collected from news feeds, categorized in different types ranging from anything like a military attack, the visit of an official, or the provision of economic aid, and finally assessed by their severity impact as a hostile, neutral or cooperative event.
Finally, all these indicators are aggregated into a composite risk score that you see at the left of this panel, just next to the country names and ISO codes. The composite score is a relative rank score, which gives a holistic view on the long-term AND short-term aspects of country risk. We express it in quintiles from 1-5 where “1” is best and “5” is worst.
In my next video, I will apply this framework to the biggest 22 oil price losers with a focus on a few key players, starting with the least risky – Canada, Norway, and the US – and then exploring the riskiest cases such as Venezuela and Libya, and concluding with Iran and Russia, which are both focal points for investors because of recent geopolitical events.
Learn more in the below video:
On Thursday, October 22nd, we will be posting Part 2 of this Video & Blog Series. If you would like more information about S&P Capital IQ’s Country Risk Intelligence and Surveillance Panel or would like to be added to our mailing list, please contact us. And keep a look out for our future Credit Risk Videos and Webinars here and on our credit risk website.
 Eric Norland, CME Group, ‘The Geopolitical and Economic Consequences of Lower Oil Prices’, March 2015