Country Default Spreads and Risk Premiums

Last updated: July 14, 2023

This table summarizes the latest bond ratings and appropriate default spreads for different countries. While you can use these numbers as rough estimates of country risk premiums, you may want to modify the premia to reflect the additonal risk of equity markets. To estimate the long term country equity risk premium, I start with a default spread, which I obtain in one of two ways:
(1) I use the local currency sovereign rating (from Moody's: www.moodys.com) and estimate the default spread for that rating (based upon traded country bonds) over a default free government bond rate. For countries without a Moody's rating but with an S&P rating, I use the Moody's equivalent of the S&P rating. To get the default spreads by sovereign rating, I use the CDS spreads and compute the average CDS spread by rating. Using that number as a basis, I extrapolate for those ratings for which I have no CDS spreads.
(2) I start with the CDS spread for the country, if one is available and subtract out the US CDS spread, since my mature market premium is derived from the US market. That difference becomes the country spread. For the few countries that have CDS spreads that are lower than the US, I will get a negative number.
You can add just this default spread to the mature market premium to arrive at the total equity risk premium. I add an additional step. In the short term especially, the equity country risk premium is likely to be greater than the country's default spread. You can estimate an adjusted country risk premium by multiplying the default spread by the relative equity market volatility for that market (Std dev in country equity market/Std dev in country bond).  Sicnce government   bonds are  not available or traded in most countries, I approximate the relative equity market volatility by estimating the standard deviations in two indices, the S&P emerging market equity index (for equities) and an iShares emerging market government bond ETF (for government bonds), and using that ratio for all countries to estimate the additional country risk premium. Finally, I add that country risk premium to my estimate of a mature market equity risk premium, for which I use the implied equity ris premium of the S&P 500.

Excel file with full country risk premium data: https://www.stern.nyu.edu/~adamodar/pc/datasets/ctrypremJuly23.xlsx
If you are interested in my approach to computing the equity risk premium, download my magnum opus (just kidding):
https://papers.ssrn.com/sol3/papers.cfm?abstract_id=4398884

And my paper on measuring country risk
https://papers.ssrn.com/sol3/papers.cfm?abstract_id=4161010

Last updated: July 2023

Aswath Damodaran