How We Rate Emerging And Frontier Markets
Overview
Emerging and frontier markets are strategically positioned to drive global economic growth through the expansion of their domestic markets.
Emerging and frontier markets will play a crucial role in shaping the global economy and driving growth, contributing approximately 65% of global economic growth by 2035. Frontier markets, particularly countries in sub-Saharan Africa, will play a prominent role in this growth due to their favorable demographics—but face significant challenges from persistently high inflation and political uncertainty.
At S&P Global Ratings, our mission is to provide high-quality, objective, and independent analytical information to the market. We rate emerging and frontier markets across the world that feature diverging fundamentals and a broad range of credit risks and opportunities. Our credit analysts rate these countries using the same methodology we apply to all of our sovereign ratings to ensure consistency. We have a 30-year track record of rating sovereigns in Africa and have had employees based on the continent since 2008.
S&P Global Ratings defines emerging markets as countries that have been or are transitioning toward middle-income levels—with good access to global capital markets, deepening domestic capital markets, and global economic relevance based on economic size, population, and share in global trade. We consider frontier markets to be countries with low income per capita (below $2,500 GDP) that face bigger economic challenges and financing needs, which are rated ‘B’ or in lower categories. Sub-Saharan Africa includes countries in both classifications, many of which rely on international institutions for vital policy and financial support in expanding their domestic capital markets. Our ratings on sub-Saharan African sovereigns include both investment- and speculative-grade ratings.
Understanding Sovereign Ratings
Sovereign ratings and research play an important role in optimizing financial transparency.
Our credit ratings express a forward-looking, independent opinion about the capacity and willingness of an issuer to meet its financial commitments, based on both quantitative and qualitative analysis. We apply the same publicly available methodology to all of the sovereigns that we rate—totaling more than 135 worldwide, and including emerging markets and frontier countries—to ensure consistency. Our default and transition studies continue to show that our ratings on sovereigns have strong, long-term track records—and are effective at measuring relative credit risk over time.
A sovereign’s creditworthiness is determined by our analysis of institutional and governance effectiveness, economic structure and growth prospects, external finances, and fiscal and monetary flexibility. These ratings are the result of a surveillance process that involves independent research involving a diverse set of information from official government sources, multilateral institutions, and interactions with market participants and stakeholders relevant to understanding the sovereign’s credit profile.
We are committed to the highest standards in our ratings activities, and our opinions and measures of risk are rooted in our deep experience. S&P Global Ratings credit analysts have deep specialist and local knowledge in assessing these sovereigns and typically engage with governments directly for discussion and insights. Credit ratings are just one of many inputs that investors and other market participants can consider as part of their decision-making processes.
Rating Scale
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Investment Grade
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Speculative Grade
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AAA
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AA
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A
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BBB
What is a AAA rating?
A AAA credit rating is the highest possible rating assigned by S&P Global Ratings, representing an extremely strong capacity to meet financial commitments. Entities with a AAA rating are considered to have the lowest credit risk, making them highly attractive to investors. This rating indicates that the issuer is highly likely to fulfill its financial obligations without any risk of default, reflecting a robust financial position and operational stability.
What is a AA rating?
A AA credit rating signifies a very strong capacity to meet financial commitments, although it is somewhat more susceptible to adverse economic conditions than AAA-rated entities. This rating reflects high quality and low credit risk, indicating that the issuer is likely to fulfill its obligations, even in challenging economic environments. Investors view AA-rated entities as reliable, but with a slightly higher risk compared to those rated AAA.
What is an A rating?
An A credit rating indicates a strong capacity to meet financial commitments, but it is more susceptible to adverse economic conditions. Entities rated A are generally stable and financially sound, yet they may face challenges during economic downturns or periods of financial instability. This rating suggests that while the issuer is likely to meet its obligations, there is a moderate level of risk involved.
What is a BBB rating?
A BBB credit rating represents an adequate capacity to meet financial commitments, but it is more subject to adverse economic conditions. This rating is considered investment grade, indicating moderate risk. Entities rated BBB are viewed as having a reasonable likelihood of fulfilling their obligations, but investors should be aware that economic shifts could impact their financial stability.
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BB
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B
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CCC
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CC
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C
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D
What is a BB rating?
A BB credit rating indicates that an entity is less vulnerable in the near term, but faces major ongoing uncertainties. This rating reflects a speculative nature, suggesting that the entity may be more impacted by economic downturns or other adverse conditions. While BB-rated entities might currently manage their obligations, investors should be cautious due to potential volatility.
What is a B rating?
A B credit rating signifies that an entity is more vulnerable to adverse business, financial, or economic conditions, yet currently has the capacity to meet financial commitments. This rating indicates a higher level of risk, suggesting that while the issuer may be able to meet its obligations now, future challenges could jeopardize its financial health.
What is a CCC rating?
A CCC credit rating indicates that an entity is currently vulnerable and dependent on favorable business, financial, and economic conditions to meet its financial commitments. This rating suggests a significant risk of default, meaning that the issuer's ability to fulfill its obligations is highly uncertain and contingent on external factors.
What is a CC rating?
A CC credit rating signifies that an entity is highly vulnerable, with default being a real possibility. This rating indicates that the entity is in distress and may not be able to meet its obligations. Investors should be aware that entities rated CC face severe financial challenges and may be at risk of defaulting on their debts.
What is a C rating?
A C credit rating indicates that an entity is highly vulnerable to nonpayment, and the likelihood of default is almost certain. This rating reflects a critical financial situation where the issuer is struggling to meet its obligations. Investors should approach entities rated C with extreme caution, as they are at a very high risk of default.
What is a D rating?
A D credit rating signifies default, meaning that payment has not been made on the due date. This rating indicates that the entity is unable to meet its financial obligations, and investors should consider their investments in such entities to be at high risk. A D rating serves as a clear warning that the issuer is in default status.
Our Analyses of Climate Finance
Climate finance represents financial flows to facilitate mitigation and adaption to climate change.
We believe the transition and adaptation financing gap in emerging markets and low-income countries is a critical issue. Our research shows that lower-income countries are disproportionally at risk of economic losses from, and are more exposed to, physical climate risks—yet receive the least amount of investment to transition their economies and build resilience. S&P Global Ratings estimates that frontier economies, mostly located in Africa, would need to spend 33.3% of GDP by 2030 to achieve renewable power generation goals under the Sustainable Development Scenario required to reach the U.N.'s key energy-related goals, compared with 10.7% of GDP for other emerging markets and 4% for G7 economies.
Implementing comprehensive and coordinated climate policies and strategies remains a challenge for many governments and companies. In S&P Global Ratings’ view, long-term local and global financial stability could over time be undermined if the climate finance gap (and associated social and environmental issues) for emerging market and low-income countries is not addressed. Transition and adaptation investment needs will require major scaling up and mobilization of international financial resources. Absent strong mobilization from all stakeholders, the financing gap will continue to grow.
Ultimately, a sovereign’s decision and ability to invest in health, infrastructure, climate-mitigation, and other critical projects is often based on their own capacity to generate feasible and bankable projects. The gap in private sector mobilization to help achieve net-zero targets is significantly linked to the level of investors’ risk appetite for these projects.
Frontier economies have limited domestic financial resources to solve this problem alone, and the world cannot complete its energy transition without these countries. Because the key to unlocking private sector resources is driven by general investment conditions, we are actively engaging with stakeholders to provide additional transparency on the roadblocks to capital mobilization.
