7 th February 2014
description
Transcript of 7 th February 2014
![Page 1: 7 th February 2014](https://reader033.fdocuments.net/reader033/viewer/2022061617/568164db550346895dd72e51/html5/thumbnails/1.jpg)
Global macroeconomic Energy Transitionmeets
Sovereign Credit Rating Evolution
What scenarios ?7th February 2014
![Page 2: 7 th February 2014](https://reader033.fdocuments.net/reader033/viewer/2022061617/568164db550346895dd72e51/html5/thumbnails/2.jpg)
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
![Page 3: 7 th February 2014](https://reader033.fdocuments.net/reader033/viewer/2022061617/568164db550346895dd72e51/html5/thumbnails/3.jpg)
1. Mainstream finance underestimates energy and climate financial materiality
![Page 4: 7 th February 2014](https://reader033.fdocuments.net/reader033/viewer/2022061617/568164db550346895dd72e51/html5/thumbnails/4.jpg)
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
![Page 5: 7 th February 2014](https://reader033.fdocuments.net/reader033/viewer/2022061617/568164db550346895dd72e51/html5/thumbnails/5.jpg)
1. IEA has systematically sent a biased price signal on oil prices
![Page 6: 7 th February 2014](https://reader033.fdocuments.net/reader033/viewer/2022061617/568164db550346895dd72e51/html5/thumbnails/6.jpg)
1. Forward oil prices are artificially low
![Page 7: 7 th February 2014](https://reader033.fdocuments.net/reader033/viewer/2022061617/568164db550346895dd72e51/html5/thumbnails/7.jpg)
1. When there is a signal, it is not heard …
![Page 8: 7 th February 2014](https://reader033.fdocuments.net/reader033/viewer/2022061617/568164db550346895dd72e51/html5/thumbnails/8.jpg)
1. CO2 emission rights prices are not incentives
![Page 9: 7 th February 2014](https://reader033.fdocuments.net/reader033/viewer/2022061617/568164db550346895dd72e51/html5/thumbnails/9.jpg)
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
![Page 10: 7 th February 2014](https://reader033.fdocuments.net/reader033/viewer/2022061617/568164db550346895dd72e51/html5/thumbnails/10.jpg)
Increased volatility weighs on investments decision
and their profitability
1. Energy impact on GDP growth is underestimated
![Page 11: 7 th February 2014](https://reader033.fdocuments.net/reader033/viewer/2022061617/568164db550346895dd72e51/html5/thumbnails/11.jpg)
Emerging hedging strategies on oil import/export for Sovereigns facing
increased price volatility
1. Energy impact on GDP growth is underestimated
![Page 12: 7 th February 2014](https://reader033.fdocuments.net/reader033/viewer/2022061617/568164db550346895dd72e51/html5/thumbnails/12.jpg)
2. The come-back of sovereign risks
![Page 13: 7 th February 2014](https://reader033.fdocuments.net/reader033/viewer/2022061617/568164db550346895dd72e51/html5/thumbnails/13.jpg)
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
![Page 14: 7 th February 2014](https://reader033.fdocuments.net/reader033/viewer/2022061617/568164db550346895dd72e51/html5/thumbnails/14.jpg)
2. Sovereign risk is key to credit risk assessment
Sovereign debt impact
Sovereign debt volume
Sovereign debt maturity < EOTW
Sovereign debt currency
![Page 15: 7 th February 2014](https://reader033.fdocuments.net/reader033/viewer/2022061617/568164db550346895dd72e51/html5/thumbnails/15.jpg)
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)
![Page 16: 7 th February 2014](https://reader033.fdocuments.net/reader033/viewer/2022061617/568164db550346895dd72e51/html5/thumbnails/16.jpg)
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
![Page 17: 7 th February 2014](https://reader033.fdocuments.net/reader033/viewer/2022061617/568164db550346895dd72e51/html5/thumbnails/17.jpg)
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
![Page 18: 7 th February 2014](https://reader033.fdocuments.net/reader033/viewer/2022061617/568164db550346895dd72e51/html5/thumbnails/18.jpg)
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
![Page 19: 7 th February 2014](https://reader033.fdocuments.net/reader033/viewer/2022061617/568164db550346895dd72e51/html5/thumbnails/19.jpg)
3. RISKERGY’s innovative approach of sovereign financial ratings
![Page 20: 7 th February 2014](https://reader033.fdocuments.net/reader033/viewer/2022061617/568164db550346895dd72e51/html5/thumbnails/20.jpg)
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
![Page 21: 7 th February 2014](https://reader033.fdocuments.net/reader033/viewer/2022061617/568164db550346895dd72e51/html5/thumbnails/21.jpg)
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)
![Page 22: 7 th February 2014](https://reader033.fdocuments.net/reader033/viewer/2022061617/568164db550346895dd72e51/html5/thumbnails/22.jpg)
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
?
![Page 23: 7 th February 2014](https://reader033.fdocuments.net/reader033/viewer/2022061617/568164db550346895dd72e51/html5/thumbnails/23.jpg)
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
![Page 24: 7 th February 2014](https://reader033.fdocuments.net/reader033/viewer/2022061617/568164db550346895dd72e51/html5/thumbnails/24.jpg)
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 energyEnergy intensityEnergy 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
![Page 25: 7 th February 2014](https://reader033.fdocuments.net/reader033/viewer/2022061617/568164db550346895dd72e51/html5/thumbnails/25.jpg)
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 risksExternal factors
![Page 26: 7 th February 2014](https://reader033.fdocuments.net/reader033/viewer/2022061617/568164db550346895dd72e51/html5/thumbnails/26.jpg)
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
OptimizationRegulatory
requirements and identification of client needs/expectations
Marketing and decision making
toolsFund raising Relations with
international instituionnal investors
![Page 27: 7 th February 2014](https://reader033.fdocuments.net/reader033/viewer/2022061617/568164db550346895dd72e51/html5/thumbnails/27.jpg)
4. Scenarios and Riskergy
![Page 28: 7 th February 2014](https://reader033.fdocuments.net/reader033/viewer/2022061617/568164db550346895dd72e51/html5/thumbnails/28.jpg)
4. Scenarios
Big3 methodologies Regulation guidelines RISKERGY R&D
![Page 29: 7 th February 2014](https://reader033.fdocuments.net/reader033/viewer/2022061617/568164db550346895dd72e51/html5/thumbnails/29.jpg)
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
![Page 30: 7 th February 2014](https://reader033.fdocuments.net/reader033/viewer/2022061617/568164db550346895dd72e51/html5/thumbnails/30.jpg)
4. Institutional forecast : IMF
![Page 31: 7 th February 2014](https://reader033.fdocuments.net/reader033/viewer/2022061617/568164db550346895dd72e51/html5/thumbnails/31.jpg)
4. Institutional forecast : IMF (2)
![Page 32: 7 th February 2014](https://reader033.fdocuments.net/reader033/viewer/2022061617/568164db550346895dd72e51/html5/thumbnails/32.jpg)
IMF Forecast : ALPLBT model bias
![Page 33: 7 th February 2014](https://reader033.fdocuments.net/reader033/viewer/2022061617/568164db550346895dd72e51/html5/thumbnails/33.jpg)
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
![Page 34: 7 th February 2014](https://reader033.fdocuments.net/reader033/viewer/2022061617/568164db550346895dd72e51/html5/thumbnails/34.jpg)
ESMA methodology guidelines … but not for scenarios !
![Page 35: 7 th February 2014](https://reader033.fdocuments.net/reader033/viewer/2022061617/568164db550346895dd72e51/html5/thumbnails/35.jpg)
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
![Page 36: 7 th February 2014](https://reader033.fdocuments.net/reader033/viewer/2022061617/568164db550346895dd72e51/html5/thumbnails/36.jpg)
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
![Page 37: 7 th February 2014](https://reader033.fdocuments.net/reader033/viewer/2022061617/568164db550346895dd72e51/html5/thumbnails/37.jpg)
Thanks for you attention
Michel LEPETIT, [email protected], 06-03-26-93-18Rodolphe BOCQUET, [email protected] , 06-34-18-73-97
![Page 38: 7 th February 2014](https://reader033.fdocuments.net/reader033/viewer/2022061617/568164db550346895dd72e51/html5/thumbnails/38.jpg)
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