Sovereign credit rating is the result of credit analysis, issued by regulated rating agencies, attaching scores to a given sovereign debt issuer. Those agencies evaluate the capacity and the willingness of a sovereign to honor, timely and fully, its debt payments. The rating is a relevant instrument for investors, since it provides an independent opinion about the government's debt credit rating.
Officially, Brazil has contracts with rating with the following agencies: Standard & Poor´s (S&P), Fitch Ratings (Fitch) and Moody´s Investor Service. Additionally, other international agencies regularly monitor the credit rating of the country, such as Dominion Bond Rating Service (DBRS-Canada), the Japan Credit Rating Agency (JCR), Rating and Investment Information (R&I-Japan), NICE Investors Service (South Korea) and Dagong Global Credit Rating (China).
The credit rating agencies usually attribute grades for the short and long term debt, in local and foreign currency. The grade for the issuance of long term in foreign currency is the most common used with reference to represent the credit rating of the country. The scales used by the agencies can be represented by letters, numbers and mathematical signals (+ or -) and normally go from 'D' (lowest grade) to 'AAA'(highest grade). Those grades are ranked, by market participants, in two groups: Speculative Grade (D to BB+) and Investments Grade (BBB- to AAA).
Brazil's Credit Rating
Although technically sovereign ratings directly apply to sovereign fixed income securities, with considerable implications for their pricing, their importance stretches far beyond that. The sovereign rating has other following critical implications for a country:
- To the extent that it impacts the cost of sovereign borrowing, a rating could greatly affect the government's fiscal flexibility;
- In most cases, the sovereign rating sets either a ceiling or a guideline vis-à-vis all corporate and financial sector ratings in a country, thus affecting overall private sector borrowing costs in the market;
- It determines counterparty risk pricing for bank loans (many international banks rely on public ratings for their risk charge assessment) which, in turn, frequently affects the pricing for trade lines;
- It gives guidance to regulated institutional investors, such as pension funds and insurance companies, on whether they are allowed to invest in a country;
- The sovereign rating, along with the publicity associated with it, serves as a common reference point for foreign investors at large, and as such, impact foreign direct investment flows.
- It generates an important part of overall external perceptions about a country and its trends;