global macroeconomic energy transition meets sovereign credit rating evolution what scenarios ? 7th...
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Global macroeconomic Energy Transitionmeets
Sovereign Credit Rating Evolution
What scenarios ?7th February 2014
Key issues addressed:• Why does mainstream finance
underestimate energy and climate issues?
• The come-back of sovereign risks
• RISKERGY’s innovative approach of Sovereigns financial rating
• Scenarios
1. Mainstream finance underestimates energy and climate financial materiality
1. Three main “market failures”
Oil price signal has proven to low
No price signal on CO2 emissions
Classic economy does not integrate energy as a wealth production factor
1. IEA has systematically sent a biased price signal on oil prices
1. Forward oil prices are artificially low
1. When there is a signal, it is not heard …
1. CO2 emission rights prices are not incentives
Strong shift in price trend for raw materials
since 2000
Increased correlation of raw material prices
with oil prices
1. Energy impact on GDP growth is underestimated
Increased volatility weighs on investments decision
and their profitability
1. Energy impact on GDP growth is underestimated
Emerging hedging strategies on oil import/export for Sovereigns facing
increased price volatility
1. Energy impact on GDP growth is underestimated
2. The come-back of sovereign risks
2. Sovereign risk is key to credit risk assessment
Sovereign bonds account for 41% of global international bonds issues (outstanding amount of 41000 billion $)
The financial crisis has further increased the link between sovereign credit risk and financial institutions credit risk
Sovereign credit rating remains a “ceiling” for corporate credit rating.
There has been a recent shift in market appreciation of sovereign risks: from “no risk” rate to potential default of OECD countries and emerging countries new instability
Evolution in regulation are under way whereby OECD sovereign bonds will no longer bear zero risk for Capital Adequacy Ratio
2. Sovereign risk is key to credit risk assessment
Sovereign debt impact
Sovereign debt volume
Sovereign debt maturity < EOTW
Sovereign debt currency
2. Main limitations of current methodologies for assessing sovereign risks (Big 3)
As underlined by the recent ESMA survey, to little expertise is dedicated to sovereign risks (low profitability of business model)
2. Main limitations of current methodologies for assessing sovereign risks (Big 3)
Ratings eventually depend on a very limited number of criteria, GDP/Capita being one of the main driver (no anticipation on Irish crisis) (What “Hides” Behind Sovereign Debt Ratings? - António Afonso, Pedro Gomes, and Philipp Rother - November 2006)
Ratings suffer from a strong inertia and sudden adjustments prove to have a pro-cyclical effect and to increase volatility
Current methodologies are snapshots of few key indicators and do not integrate forward looking analysis, corresponding to long term risk drivers and average duration of sovereign bonds
Energy and climate risks for the economy’s output and the financial robustness of the state budget are not explicitly taken into account
Energy subsidies amout to up to 3% of world GDP and
8% of total public spending
Energy subisdies prove an obstacle to investments in
key development sector such as health and education
« The paper shows that for some countries the fiscal weight of energy subsidies is growing so large that budget deficits are becoming unmanageable and threaten the stability of the economy, », IMF, Energy Subsidy Reform - Lessons and Implications,2013
2. Energy subsidies dangerously weigh on primary balances
Ex post correlation between financial ratings and energy dependency ratio
1 2 3
-40%
-20%
0%
20%
40%
60%
80%
14% 0%
-27%
69%
47%
16%
Var. médiane des nota-tions janv.04-févr.12
Indépendance énergé-tique médiane 2004
Evolution of financial ratings and energy independance of 41 countries (18 EU, 20 other Europe + 3 row) :
2. Energy dependency and financial rating prove correlated, whereas current methodologies do not provide ex ante insight on this issue
3. RISKERGY’s innovative approach of sovereign financial ratings
3. A collaborative research program
3,8M€ budget
36 months (april 2013 to april 2016)
4 firms, 3 research labs and Caisse des Dépôts
Market oriented research aiming at developping a new commercial methodology for sovereign rating
3. Riskergy main objectives
Develop macro-economic models linked with fiscal and monetary models, as support of forward looking analysis of sovereign solvency
Integrate energy as a production factor: GDP= F(W,L,E)
Develop a financial rating methodology compliant with ESMA requirements
Identify early signals of financial risks linked with energy and climate resiliency of economies (enabling potential differenciation of issuers with equivalent ratings)
3. Our modeling approach:
• Supply shock (Fukushima, Ormuz, Irak, Lybia, Russian gaz …)• Demand shock: +1% world GDP => + 0,7% oil consumption• Voluntary regulation: carbon tax• Climate change risks (floods, storms, droughts…)
What if?
Energy and or Climate
shock
Solvency
?
3. Global view of Riskergy’s approach
Scenarios and shocks
Supply
Demand
Regulation
Transmission Links
Risk exposure
Risk transmission
Risk mitigation
Sovereign risk
sensitivity
Economic performance
Financial robustness
Institutional strength
Financial markets
access and risks
External factors
Modeling
Level 1: Poles Imaclim
Level 2: National
Macro-éco national
Level 3: solvency and debt pricing
Qualitative approach
3. RISKERGY energy performance indicators (1/2)
Energy dependence
Energy dependence ratioFood dependance
ratioImports
concentration
Strategic stocks
Energy demand growth
Energy return on energy investedExploitable fossil fuel reserves
Energy contribution to economic
development
Access to energy
Energy intensity
Energy subisdies
Energy sector weight in GDP
Energy R&D
Ressources competition
Energy Infrastructure reliability
Energy consumption
mix
Quality of electricity (P,T,D)
Climate vulnerability of electric sector
Investments in new installed capacities
Reform and adaptation capacity
Gvtal measures towards low C economy
Energy taxation scheme
Investments in NRE
Energy flexibility per
usage
Environmental performance
GDP CO2 intensity
Energy consumption per
capita for transportation
Legal environmental framework for
energy productionEconomic exposure to
extreme climate events
3. RISKERGY energy performance indicators (2/2)
Energy dependence
Energy dependence ratio
…
Energy contribution to economic development
Access to energy
…
Energy Infrastructure reliability
Energy consumption
mix
…
Reform and adaptation capacity
Gvtal measures towards low C economy
…
Environmental performance
GDP CO2 intensity
…
Economic Performance
Financial robustness
Institutional strength
Financial markets access and risks External factors
3. Our collaboration scheme
Academic research
Market access
Data management
Energy scenariosModel
Hybridation: macro economy
and energy
Regional and national models
Rating methodology
validated by the Regulator: ESMA
Linkage between macro-economic and
monetary/fiscal models
Optimization
Regulatory requirements and
identification of client needs/expectations
Marketing and decision making
tools
Fund raising Relations with international
instituionnal investors
4. Scenarios and Riskergy
4. Scenarios
Big3 methodologies
Regulation guidelines
RISKERGY R&D
4. Big3 methodology is “standard & poor”
Forecast : Current year + 2 years
Mostly external scenarios (+ national scenario) Institutions : IMF / World Bank / OECD …
Note : Interestingly in most institutional macroeconomic scenarios, the price of oil is a key element, often provided by IEA Market futures
4. Institutional forecast : IMF
4. Institutional forecast : IMF (2)
IMF Forecast : ALPLBT model bias
4. ESMA regulation => simple methodologies
Data Availability Quality Traceability
Methodology (but taking into account sovereign risk specificities) Comparability (but not between different asset classes) Robustness
Scoring ≢ rating Qualitative analysis is mandatory Institutional analysis : the capacity to pay ≠ the will to
pay
ESMA methodology guidelines … but not for scenarios !
4. RISKERGY scenario options (Work in progress)
National policy “IEA new policy scenario” national options and not “450
scenario”
Infrastructure & long term evolutions are mostly given
Qualitative analysis for climate issues : impact ; resilience
4. RISKERGY scenario options (Work in progress)
Oil Diagnosis x CoalDiagnosis x Gas US Diagnosis x Gas UE Diagnosis x Gas Asia Diagnosis x National Electricity Diagnosis
With Diagnostic = overcapacity / in equilibrium / undercapacity / stress
Scenario choices 1 scenario BAU 1 scenario Oil :undercapacity 3-4 stress
Thanks for you attention
Michel LEPETIT, [email protected], 06-03-26-93-18Rodolphe BOCQUET, [email protected] , 06-34-18-73-97
2. Energy current account deficit is a driver of debt increase in a number of countries
OPEC oil revenues 2012 > 1000 Mds $French oil trade deficit in 2011 = 3,2% of GDP