CareEdge Ratings unveiled on Tuesday its sovereign rating methodology, which will be used to assess the credit profile of sovereign debt issuers on a global rating scale. 

A sovereign rating is an assessment of the sovereign’s ability and willingness to service its debt in full and in a timely manner. 

As part of a public consultation exercise, the rating agency has sought feedback/suggestions on the methodology by February 16, 2024.

Mehul Pandya, MD and CEO, CareEdge Ratings, said the ratings assigned using the sovereign rating methodology, in the future, will aid the investors and enhance the diversity of opinions in the market.

The understanding of global markets so gained will enable CareEdge Ratings in incorporating such trends in its domestic ratings as well, he added.

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The rating agency said the methodology is robust and does not differentiate in the treatment of developed and emerging economies on any parameter by applying consistent thresholds across countries.

Pandya said, in line with the best global practices, the agency is seeking feedback from market stakeholders to further enhance the methodology.

To begin with, the rating agency plans to do a SWOT (strengths, weaknesses, opportunities and threats) analysis for about 40 countries, a senior official said.

CareEdge Sovereign Ratings methodology involves analysis under five broad pillars to determine a sovereign’s creditworthiness.

These pillars are Economic Structure & Resilience (weightage: 25 per cent), Fiscal Strength (25 per cent), External Position & Linkages (16.67 per cent), Monetary & Financial Stability (16.67 per cent), and Institutions & Quality of Governance (16.67 per cent).

The assessment of each of these pillars is based on the consideration of historical, current as well as expected future trends.

Rajani Sinha, Chief Economist, CareEdge Ratings, noted that the two pillars of Economic Structure & Resilience and Fiscal Strength carry relatively more weight in the methodology.

She said Economic Structure & Resilience is the foundation of any economy and indicates its ability to grow sustainably and absorb potential shocks. Further, Fiscal Strength reflects the government’s financial discipline, and has a direct bearing on the quantum of sovereign debt.

The assessment of the five pillars is based on a set of primary and secondary factors, using a mix of quantitative and qualitative indicators.

Sinha said primary factors are assessed largely based on quantitative indicators, while secondary factors are country specific nuances that bring a qualitative overlay and analytical comprehensiveness.