A national scale rating avoids the “compression” of International scale credit ratings. On the International scale, ratings for lower-rated countries are squeezed together near the sovereign ceiling due to the “lack of space” in the rating scale. For example, if Country X is rated B+ on the International scale, then there is very little rating room below B+ for other credits in the country to be placed. By placing a sovereign at or near the top of the rating scale, as IIRA does in its national scale ratings, more distinctions among other domestic credits can be made below that level, thus providing clearer differentiation with respect to credit risk. National scale ratings reflect the strength of a sovereign as an issuer in its own currency.

B. Assistance to domestic investors

National scale ratings provide useful information to the local capital markets and help investors compare domestic issues and issuers in local currency. Many domestic investors in emerging markets feel more comfortable placing their funds in domestic financial markets and during times of global political tension, these local investors are wary of seeking investments in foreign markets. In addition, national scale ratings offer the same benefit to the growing number of non-residents that invest in a country’s local-currency paper.

C. Development of the local capital market

National scale ratings give domestic investors a clear picture of local credit distinctions permitting accurate pricing. This encourages local investment, which deepens and broadens financial markets and encourages the adoption of best practice standards. National scale ratings are particularly applicable as a nation’s asset management and pension industries grow.

Experience has shown that a national scale rating is most useful when these conditions are present:

1. When the local economy and credit markets are growing rapidly, creating the need for better credit distinction among borrowers;
2. When the local bond market is expanding, creating fixed-income instruments that require credit distinctions for the purpose of investors’ asset allocations;
3. When there is a growing need for international investment inflows.

Many countries in IIRA’s broad market meet these conditions.

Comparison with International scale ratings

National scale ratings focus on the capacity of the government and other borrowers within a country to meet their local-currency debt obligations. For the sovereign, sample of key indicators of such government capacity would include the annual growth rate of real GDP, recurrent revenues and expenditures as a percent of GDP, local currency debt as a percent of government revenues, and interest payments on debt as a percent of government expenditures. Indicators for non-governmental entities will vary depending on the industry or sector involved.

By contrast, International scale ratings, with their emphasis on foreign-currency debt, take into account external liquidity and factors affecting a country’s balance of payments. National scale ratings apply to local currency credit risks, so they do not factor in foreign currency transfer risk. However, they do include the extent of any external support for an entity, such as a government guarantee of a company’s liabilities.

Unlike International scale ratings, IIRA’s national scale ratings are not intended to be compared across two or more countries. Each country has a separate rating scale ranging from AAA (most creditworthy) to C (highest credit risk) to D (default). The rest of the credits in a country are placed between the two extremes according to their credit quality.

Different countries (or entities) rated the same on IIRA’s national scale will not have the same credit risk profile. For example, a AA-rated entity in Kuwait will not necessarily have the same level of credit risk as a AA-rated entity in Malaysia.

National scale ratings are not comparable across geographical locations, as International scale ratings are. Instead, they measure perceived risk relative to the “best” credit risk in each country. They are a measure of the intrinsic financial strength of the borrower. IIRA takes into account such credit factors as the quality of management, financial flexibility, and the success of past policies, whether corporate or governmental. For sovereigns, IIRA places analytical emphasis on the country’s inherent political strengths and weaknesses, the financial health of the banking system, and trends in the country’s budgetary performance.

Not every country is AAA

The central government in every country is almost always the most creditworthy entity in the country owing to its unique powers of taxation and currency creation. However, it is useful to differentiate among sovereigns by assigning non-AAA ratings to some of them depending on their structural and institutional characteristics and certain risk factors. A national scale provides room for possible sovereign upgrades as well as the use of the full rating spectrum. Thus, unlike the practice of some global rating agencies, IIRA does not assign an automatic AAA to all sovereigns.

In some unusual circumstances, a non-government entity (such as a multinational corporation) may continue to honor its obligations even when the government of the country has defaulted on its local currency debt. In such cases, the non-government entity may be ranked higher than the government (and higher than state-owned or state-guaranteed enterprises).

Definitions of credit risk on the national rating scale:

Long-term Ratings

• AAA.ns*: 'AAA' rated obligors/issues have the lowest credit risk and strongest capacity to honor their financial obligations. Unfavorable business and economic conditions are unlikely to distress this capacity.
• AA.ns: 'AA' rated obligors/issues have very low credit risk and a very strong capacity to meet their financial commitments. No material change in this capacity is expected due to unfavorable business and economic conditions in the future.
• A.ns: 'A' rated obligors/issues exhibit low credit risk and possess strong capacity to meet their financial commitments. A negative change in business and economic conditions may slightly affect the honoring capacity.
• BBB.ns: A 'BBB' rated obligor/issue exhibits adequate credit risk and sufficient ability to fulfill the financial obligations. However, unfavorable business conditions can bring a change in this capability.
• BB.ns: 'BB' rated obligors/issues present moderate credit risk and their ability to honor financial commitments is relatively inferior. Although this capacity is present in current circumstances, it may not persist in the future.
• B.ns: 'B' rated obligors/issues have a sizeable level of credit risk and a low capacity to meet their financial obligations. The entity remains vulnerable to changes in the business and economic environment.
• CCC.ns: A 'CCC' rated obligor/issue exhibits a high level of credit risk and a weak ability to meet financial commitments. The entity requires favorable business conditions to ensure payments.
• CC.ns: 'CC' rated obligors/issues show a substantially high level of credit risk and a very weak capability of honoring financial obligations. The entity is unable to benefit from prospective improvements in the economic environment.
• C.ns: A 'C' rated obligor/issue has an extremely high level of credit risk and the weakest capacity to meet financial commitments.
• D.ns: A 'D' rated obligor/issue is in default with respect to their financial obligations.

Short-term Ratings

• A-1+.ns: 'A-1+' rated obligors/issues have the highest certainty of meeting their short-term obligations on time. The liquidity condition is extremely strong.
• A-1.ns: An 'A-1' rated obligor/issue has a strong capacity to honor timely payments due to very good liquidity conditions.
• A-2.ns: 'A-2' rated obligors/issues exhibit a sound capacity to meet financial commitments. The liquidity conditions are satisfactory.
• A-3.ns: Although the risks for obligors/issues in this category are greater than the other categories, a timely payment can still be safely forecasted due to an adequate liquidity situation.
• B.ns: The obligor/issue is susceptible to economic changes which can harm the liquidity conditions. The timely repayment capacity is weak.
• C.ns: Considerable uncertainty exists towards the timely honoring of financial obligations. The liquidity conditions appear very weak.
• D.ns: A 'D' rated obligor is in default with respect to its financial obligations.

*The initials of the country for which a national scale rating is assigned will be substituted for “ns” in the above ratings.