BLACKROCK INVESTMENT INSTITUTE

BLACKROCK SOVEREIGN RISK UPDATE THIRD QUARTER 2015

OCTOBER 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 troubling trends in emerging markets. Try our interactive BSRI to view individual country scores, compare two countries and sort rankings by index components. Our main headlines:

}Russia tumbled six notches in the rankings to 29th place as the sharp fall in oil prices weighed on its fiscal outlook. See page 3 for details.

}Israel jumped four places in the rankings to 21st place, driven by improving fiscal and external finance dynamics. An upgrading of consensus forecasts for growth and inflation have led to an easing of Israel’s expected long-term debt burden. An improvement in the current account balance and a reduction in the amount of government debt due to mature in the near term also helped.

}New Zealand rose three places to 7th place. The International Monetary Fund (IMF) upgraded its estimate of the country’s gross assets, leading to a fall in New Zealand’s net debt-to-GDP ratio — a key measure of fiscal sustainability.

}Thailand rose two places after the IMF revised down its assessment of the country’s net debt-to-GDP ratio. An expected narrowing of Thailand’s structural budget deficit also helped its score.

}Colombia fell three notches after the IMF lifted its estimate of the country’s net debt-to-GDP ratio to 40%, from 29%. Neighbouring Peru fell two spots, also driven by a modest increase in the country’s net debt-to-GDP ratio. An expected widening of Peru’s budget deficit and a downgrading of longer-term growth expectations also weighed on its score.

}Denmark and Poland slipped two notches in the rankings, both on modest declines in their fiscal health. Finland declined three notches.

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 October 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 ]T H I R D Q U A R T E R 2 0 15 U P D AT E

Source: BlackRock Investment Institute, October 2015.

EMERGING PAINEmerging Market BSRI Score Contributions, September 2015

Source: BlackRock Investment Institute, October 2015. Note: The selected emerging markets make up the top three countries each by weight in the JP Morgan EMBI Global Diversified Index (hard currency) and JP Morgan GBI-EM Broad Diversified Index (local currency).

BS

RI S

CO

RE

-0.6

-0.4

-0.2

0

0.2

0.4

PH CN RU IN BR MX

ExternalFinance

Fiscal Space

Willingnessto Pay

FinancialSector Health

Overall

MAPPING SOVEREIGN RISKBSRI Country Rankings by Quintile, September 2015

CLICK FOR INTERACTIVE DATA

Forecasts of the country’s budget deficit are widening. Brazil’s Willingness to Pay score also fell as President Dilma Rousseff battled to avoid impeachment proceedings.

EMERGING WOESThe collapse in commodity prices has dealt a blow to the sovereign risk profile of exporters of raw materials — especially in the emerging world. Russia registered the biggest BSRI score decline in the third quarter, declining to 29th place. The country now sits roughly in the middle of the pack of its largest emerging market peers, falling right between China and India. See the chart on the right.

Russia’s Fiscal Space score fell sharply on a deteriorating budget outlook. The country relied on the oil and gas industry for 51% of its fiscal revenues in 2014, IMF data show. The falling oil price and economic sanctions are also eating away at the country’s strong suit — its External Finance score. The current account surplus is shrinking and foreign reserves are dwindling as Russia tries to halt a slide in its currency.

Brazil fell one notch to 38th place. Latin America’s largest economy is set to contract 3% this year according to the IMF, driven by falling commodity prices, political instability, and a collapse in business and consumer confidence. A decline in Brazil’s Fiscal Space score was the main driver.

1 Norway2 Singapore3 Switzerland4 Sweden5 Taiwan6 Germany7 New Zealand8 Canada9 Denmark

10 Australia

Top ten

11 Netherlands12 Finland13 United States14 South Korea15 Austria16 Chile17 Czech Republic18 United Kingdom19 Malaysia20 Belgium

11-20

21 Israel22 Poland23 Peru24 Philippines25 Thailand26 Japan27 China28 France29 Russia30 Ireland

21-30

31 Turkey32 South Africa33 Colombia34 Indonesia35 Slovakia36 Spain37 India38 Brazil39 Hungary40 Nigeria

31-40

41 Mexico42 Croatia43 Slovenia44 Italy45 Argentina46 Portugal47 Egypt48 Venezuela49 Ukraine50 Greece

Bottom ten

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GLOBAL CHIEF INVESTMENT STRATEGISTS Ewen Cameron Watt and Russ Koesterich

EXECUTIVE EDITORJack Reerink

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Lit. No. BII-BSRI-1015 5418A-MC-1015 / BII-0091