- Sovereign Debt
Beyond Ratings’ Sovereign ESG analysis can help identify seemingly undervalued Sovereign bond markets.
This is a brief introduction to an upcoming Research Note from Beyond Ratings exploring the relationship between ESG and sovereign yield spreads. Our preliminary research focuses on 81 countries. We compute an annual average of 5Y S-CDS spreads for 2018. 5Y S-CDS spreads are a widely used indicator of the risk of default in the Sovereign bond market and it is possible to approximate sovereign risk with this bond market indicator.
Then, we compute a long-term measurement of sovereign sustainability risk change, i.e., a distance between the average over the last 10 years of the ESG score and an average over the last 4 quarters of 2018. The higher the value of this measurement, the greater the improvement in Sovereign risk under the ESG point of view and vice versa.
Figure 1: Long-term sustainability change vs. 2018 5Y S-CDS spread average
Figure 1 shows the results on advanced economies and emerging economies (country groups follow the International Monetary Fund (IMF) classification), with the dotted lines indicating the Ordinary Least Squares (OLS) regression line. We then analyse: (i) which countries have seen their sustainability score tendentially improved over the last 10 years, i.e., a positive number on the right-hand side of the Figure, and (ii) which countries have seen their 5Y S-CDS spreads “over-priced” on average in 2018.
We find that some advanced economies including Australia, Iceland, Taiwan, and some Eastern European countries, could appear undervalued given their ESG performance. For emerging markets and developing economies, we find that Argentina, Pakistan, Angola, Jamaica, Sri Lanka, the Dominican Republic, Vietnam and Uruguay present similar characteristics.
Further research will be published soon that help us to better understand the causal relationships between a country's ESG performance and the sovereign risk associated with it.
Sources: Datastream, Beyond Ratings
Authors: Julien Moussavi (Head of Economic Research), Gabriela Aguilera-Lizarazu (Analyst)