BlackRock Investment InstItute

BlackRock soveReIGn RIsk InDeX SECOND QUARTER 2015

JULY 2015

[ 2 ] B l a c k R o c k s o v e R e I G n R I s k I n D e X

Sovereign Risk UpdateOur latest update of the BlackRock Sovereign Risk Index (BSRI) details quarterly movers in our 50-country index and highlights divergent trends in peripheral Europe. Try our interactive BSRI to view individual country scores, compare two countries and sort rankings by index components components. Our main headlines:

} malaysia registered the largest BSRI score decline in the second quarter. It dropped one notch to 19th place as rating agency Moody’s reduced its estimate of the country’s foreign exchange and gold reserves to 30% of GDP from 37%.This resulted in an increase in Malaysia’s estimated net debt levels—and a modest deterioration in its (strong) External Finance Position.

} mexico dropped two notches to 42nd place on a modest decline in its BSRI score. Small score changes can sometimes lead to outsized changes in rankings when countries are closely bunched together in our index. A decline in Mexico’s Willingness to Pay score—our gauge of perceived government stability and effectiveness—was behind the fall.

} Indonesia dropped two places, also driven by a decline in its Willingness to Pay. The country’s Fiscal Space weakened too; the term structure of Indonesia’s debt deteriorated, with a small rise in the share set to mature in the coming two years.

} argentina fell one notch. International Monetary Fund data showed a decrease in the share of the country’s government debt held domestically. And the term structure of Argentina’s debt has become more unfavorable, with a greater portion up for refinancing in the coming two years.

} nigeria rose three notches to 39th place, leaping out of the fifth quintile of our index. A sizable improvement in Willingness to Pay (still the country’s Achilles’ heel) was the main driver.

Drawing on a pool of financial data, surveys and political insights, the BSRI provides investors with a framework for tracking sovereign credit risk. The index uses more than 30 quantitative measures, complemented by qualitative insights from third-party sources.

The index breaks down the data into four main categories that each count toward a country’s final BSRI score and ranking: Fiscal Space (40%), Willingness to Pay (30%), External Finance Position (20%) and Financial Sector Health (10%).

} Fiscal space includes metrics such as debt to gross domestic product (GDP), the debt’s term structure, tax revenues and dependency ratios.

} Willingness to Pay measures a government’s perceived effectiveness and stability, and factors such as perceived corruption.

} external Finance Position includes exposure to foreign currency debt and the state of the current account balance.

} Financial sector Health gauges the banking system’s strength.

For full descriptions, see Introducing the BlackRock Sovereign Risk Index of June 2011. The BSRI’s inputs are updated at irregular intervals, meaning some changes may only reflect the timing of data releases. Small changes in scores can spur big changes in rankings, as many issuers are bunched together in the index. The BSRI is not meant to forecast the creditworthiness of countries.

The opinions expressed are as of July 2015 and may change as subsequent conditions vary.

Benjamin BrodskyGlobal Head of BlackRock Fixed Income Asset Allocation

Sami MesrourMember of BlackRock Multi-Asset Strategies Group

Ewen Cameron WattChief Investment Strategist, BlackRock Investment Institute

Garth FlanneryMember of BlackRock Model-Based Fixed Income Team

[ 3 ]s e c o n D Q u a R t e R 2 0 15 u P D at e

Source: BlackRock Investment Institute, July 2015.

DIveRGInG PeRIPHeRyEurozone Periphery BSRI Scores, 2011–2015

Source: BlackRock Investment Institute, June 2015.

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Jun 2015Jun 2014Jun 2013Jun 2012Jun 2011

BS

RI S

CO

RE

Spain

Italy

Portugal

Greece

Ireland

maPPInG soveReIGn RIskBSRI Country Rankings by Quintile, June 2015

CLICK FOR INTERACTIVE DATA

1 Norway2 Singapore3 Switzerland4 Sweden5 Taiwan6 Germany7 Denmark8 Canada9 Finland

10 New Zealand

Top ten

11 Australia12 Netherlands13 USA14 South Korea15 Chile16 Austria17 Czech Republic18 United Kingdom19 Malaysia20 Peru

11-20

21 Poland22 Belgium23 Russia24 Philippines25 Israel26 China27 Thailand28 France29 Japan30 Colombia

21-30

31 Ireland32 Turkey33 Indonesia34 Slovakia35 South Africa36 India37 Brazil38 Spain39 Nigeria40 Hungary

31-40

41 Croatia42 Mexico43 Slovenia44 Italy45 Argentina46 Portugal47 Egypt48 Venezuela49 Ukraine50 Greece

Bottom ten

The rest of peripheral Europe is treading water. Italy, spain and Portugal’s BSRI scores hardly budged in the second quarter—and have risen only modestly from mid-2011 levels.

IRISH IMpROVEMENT; GREEK TRAGEDYPeripheral Europe was a story of winners and losers in the second quarter. Ireland—a poster child for fiscal reform—was the star performer. The country rose three notches (to 31st spot), leapfrogging spain to become the highest ranked eurozone peripheral economy in our index. See the chart on the right. A modest narrowing of the country’s projected budget deficit helped boost Ireland’s Fiscal Space score, an increase in its perceived stability as an investment destination enhanced its Willingness to Pay, and a falling proportion of external debt due in the coming two years helped its External Finance Position.

On the other side, Greece tumbled one notch (displacing ukraine from last spot in our index), as it raced the clock to negotiate a deal with creditors to avert default and a possible “Grexit.” The Greek government’s backtracking on reforms has led to a deterioration in its fiscal position. The country’s projected budget deficit (12 months forward) has widened to 1.7% of GDP from 0.9% of GDP a quarter ago, consensus estimates show. A weakening in perceived government stability amid the deadlock with creditors hurt Greece’s Willingness to Pay.

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Lit. No. BII-BSRI-0715 4775A-MC-0715 / BII-0074