core sector communique

Finance Ministry Develops Comparative Rating Index of Sovereigns (CRIS);
A New Index of Sovereign Credit Rating and an Estimation of CRIS over the Last Five Years

Major credit rating agencies give out the sovereign credit rating of each nation as an absolute grade. How other nations fare does not matter in a particular nation’s rating score. This is very different from a comparative rating. An example of comparative rating is the percentile score—the way GRE results are at times given. If a student is described as belonging to the 99th percentile, it clearly says something about this student’s performance vis-à-vis other students.

It is arguable that even for sovereign credit ratings there is a case for providing some kind of a comparative score. When an investor searches across nations for a place to put her money, the relative rating of nations is important. If nation i’s rating remaining the same, other nations’ ratings improve over time, there may well be a case to invest less in nation i.

Over the last five years, the global economy has gone through lots of highs and lows. Nations have moved up and down the ratings ladder. This makes it entirely possible that a particular nation that has had no rating change may now be better off or worse off in comparative terms. Also, a nation that has travelled down the rating ladder in absolute terms may be, in relative terms, better off because others have done even worse. Since, for investors, relative or comparative rating is such an important concept, it was felt that the Ministry of Finance ought to develop a new index which captures precisely this idea. Accordingly, the new index that has been developed is called the “Comparative Rating Index for Sovereigns” (CRIS). The detailed derivation of CRIS is available in the full paper on which this summary is based. The full paper is currently classified.

The computation of CRIS is based on nothing apart from Moody’s ratings and data on the GDPs of different nations as given by the IMF. In the paper we define CRIS formally and then track how nations have done over time. In order to capture this impact, the Ministry of Finance developed a new system for comparing the relative ratings of sovereign debt based on the historical evolution of their ratings over five years and the volume of their economic activity as measured by their GDP (not adjusted for Purchasing Power Parity (PPP)). The Finance Ministry develops a relative rating index and rank 101 economies according to this for the years 2007 to 2011. The index uses external data on GDP and ratings combined in terms of pure mathematical and statistical methods without interventions or interpretations.

The Moody’s ratings that the Ministry has used for all countries are the long term foreign currency sovereign ratings. To clarify, the Moody’s rating by this measure for India in 2007 and 2011 was the same (Baa 3). The CRIS score for these years for India were 66.47 (2007) and 69.83 (2011).

In other words, in relative terms India has become a better investment destination by 5.06%. In addition, India’s rank in terms of CRIS has moved up from 61st to 55th. If we view the rankings in terms of quintiles (blocks of one-fifth of the distribution) India moves from the fourth quintile to the third, that is, the middle quintile.

As expected the CRIS score for Greece has dropped sharply from 74.24 in 2007 to 13.97 in 2011—a decline of 81%; and that of Ireland and Portugal have dropped by more than 14%. Interestingly, in terms of CRIS, the U.S. has seen its score rise from 78.20 to 81.81. Ironically, this is accompanied by a loss of rank from the top of the chart to the 16th position. This shows that CRIS is distinct from a percentile score which is also a relative measure of status. In 2007 the 1st rank was shared between 20 economies but by 2011 this cohort had shrunk to 15.

The improvement in CRIS scores of nations such as India, China and Indonesia are partly due to the dramatic falls of scores of some European nations leading to a deterioration of the world average by over 4.8%.

This was especially evident in the cases of Greece, Ireland, Italy, Portugal and Spain. Dramatic falls of this type across the 2007 to 2011 period include Portugal’s fall from 23rd to 74th position with an index erosion of almost 15%, Ireland’s descent from the 1st rank club to 70th position with an over 14% fall in its index value and Greece’s precipitous dive from 30th rank to 101st (last) position accompanied by an over 81% fall in index value across the same period. Italy descended from 23rd to 37th rank with an index value loss of around 0.5%.Spain moved down from 1st to 34th rank and its index value lost approximately 1.35%. Iceland also suffered a great fall from 1st rank to 61st with an index fall of about 11.5%.

Other interesting developments include China’s index value increase of about 7.3% across the 2007 to 2011 time span. Brazil’s index value increased by 11.8%, Russia’s by about 7.5% and South Africa’s by about 5.79% in the same period. All the BRICS had improvements in rank as well as index value.

Among other economies, Israel increased in terms of CRIS value from 73.01 in 2007 to 77.58 in 2011 and Saudi Arabia had a CRIS value jump from 74.24 to 78.82 across the same period. Botswana’s CRIS value increased from 73.01 to 76.25 across the 2007 to 2011 interval.

The ten highest increases in the CRIS from 2007 to 2011 were achieved by (1) Paraguay (31.26%), (2) Lebanon (22.71%), (3) Bolivia (21.2%), (4) Uruguay (18.09%), (5) Belize and Nicaragua (both 15.63%), (7) Philippines (14.26%), (8) Indonesia (12.83%), (9) Peru (12.75%) and (10) Ecuador (12.27%). In interpreting these results, it needs to be borne in mind that for countries which began with low CRIS values, the scope for improvement is more. Seventeen economies had negative growth in the CRIS across this period. The ten highest decreases were (1) Greece (-81.19%), (2) Portugal (-14.82%), (3) Ireland (-14.14%), (4) Iceland (-11.52%), (5) Belarus (-10.05%), (6) Jamaica (-7.45%), (7) Egypt (-7.16%), (8) Cyprus (-5.94%), (9) Pakistan (-5.83%) and (10) Hungary (-4.66%).