OREANDA-NEWS. Fitch Ratings has published revised Sovereign Rating Criteria, incorporating minor drafting changes to its criteria for the rating of sovereign issuers.

The substance of the existing criteria, published on 26 May 2016, remains unaltered. The May 2016 criteria update incorporated changes in the following three areas:

- The presentation and explanation of the assignment of Fitch's sovereign ratings using a combination of the agency's existing proprietary Sovereign Rating Model (SRM) and a new Qualitative Overlay (QO).

- The introduction of a new scale for Short-Term Local-Currency (STLC) ratings for sovereigns and the introduction of guidance on the rating correspondence mapping from the Long-Term to Short-Term scales for both Local Currency (LC) and Foreign Currency (FC) Issuer Default Ratings (IDRs) to enhance transparency and consistency.

- The removal of the concept of materiality from our sovereign default definitions, to better align the definitions with those employed by other rating groups at Fitch.

Following the latest update, Fitch will shortly undertake a portfolio review exercise to assign new STLC ratings to all rated sovereigns that currently have Long-Term Local Currency (LTLC) ratings assigned and will also review both existing Short-Term Foreign Currency (STFC) ratings and the notching relationship between LTLC and Long-Term Foreign Currency (LTFC) ratings in line with the new guidance referred to above.

Fitch expects this review to result in the following changes to ratings:

- The assignment of STLC issue ratings on the new STLC 'F1+' scale will affect rated issuances for an estimated 48 countries, although we do not envisage any changes in rating relativities from this transition.

- The introduction of guidance on the rating correspondence mapping from the Long-Term to Short-Term scales, based on an assessment of reserve currency flexibility and the country's international liquidity position, is likely to result in eight existing STFC ratings being upgraded by one notch and none being downgraded. Under the new guidelines, 13 out of 14 STFC ratings will be rated at the higher of the two possible levels, at the points on the rating scale where that optionality exists. Adoption of the guidance will also result in all new STLC ratings being rated at the higher of the two possible levels.

- The application of the new guidance on the notching relationship between LTLC and LTFC is expected to result in a number of existing LTLC ratings being downgraded by one notch to bring them into line with the relevant LTFC ratings. This reflects Fitch's assessment that the credit risk profiles of sovereign LC and FC debt are typically closely aligned. This view is partly informed by recent empirical evidence - of the six Fitch-rated sovereign defaults since 2010, four have involved defaults on LC debt, compared with five involving defaults on FC debt. This supports our assessment that upward notching of LTLC ratings should be relatively rare across the portfolio.

The previous version of the criteria dated 26 May 2016 has been retired. Fitch will publish a feedback report shortly summarising the responses received to the Exposure Draft we published in respect of this criteria update in February 2016.