lunes, 28 de septiembre de 2015

lunes, septiembre 28, 2015

More Debt Downgrades Ahead for Emerging Markets

By Johanna Bennett


Brazil became the latest emerging market downgraded by a major credit rating agency earlier this month when S&P lowered the country’s sovereign debt  into junk territory.

That begs a question: Which countries could be next?

Societe Generale’s Régis Chatellier weighed in on that topic today in an 11-page note, predicting that ”further downgrades and wider spreads are inevitable,” listing 11 countries at risk in the coming months, including Venezuela, Brazil, Kazakhstan and Colombia.

Since the start of 2015, 31 emerging market nations have been downgraded by at least one of the three major rating agencies, a list that includes Russia, Venezuela, Ukraine and Brazil.

That’s twice the number of upgrades among emerging markets over the same span and roughly four times the number of downgrades among developed nations, according to data cited by Societe Generale.

Yet Chatellier argues that while “deterioration in emerging market fundamentals is tangible” thanks to China’s economic slowdown and falling commodity prices, “differentiation is necessary.”

In short, commodity-producing countries are at risk, while other emerging market still have sound fundamentals.
…the new global environment (which also includes a divergence of the Fed and the ECB monetary policies) having a different impact depending on the region, the Latin America being particularly affected, while CEE countries are actually benefitting from lower commodity prices…Among the potential downgrades, Venezuela is particularly at risk, as we believe that the country is likely to default on its external debt in the very coming months. Brazil, Kazakhstan and Colombia are also at risk of a downgrade, although they should remain in the investment-grade category (excluding the recent BB+ assessment from S&P on Brazil). For these three countries, the potential downgrades are largely reflected in bonds’ valuations, and we therefore remain market-neutral to slightly overweight these three names in our EM portfolio (see EM Credit Hawk: Brazil and Kazakhstan cheap, Indonesia EUR attractive, 18 September 2015) and EM Weekly, 24 September 2015).  
Other countries could be downgraded, although less aggressively than the previous four names. This should be the case for Malaysia, Peru, Russia, Thailand, Turkey, Chile and South Africa, and to a minor degree Bulgaria (see graph on the left).
Are any upgrades on the horizon? Ukraine and Hungary, among others, writes Chatellier.
Ukraine may be initially downgraded to “Default” status as the debt restructuring becomes effective, but it should be upgraded soon after given the lower external debt burden. We think that Hungary could also be upgraded: the external debt level remains high, but growth performance has substantially improved, and the maintenance of a sizable current account surplus has reduced the external vulnerability of the country. 
Other countries could potentially be upgraded, especially the Philippines which have become one of the most resilient EM economies, but also Poland and Slovenia. Although the fiscal deficits are currently capping their sovereign rating, an upgrade of Vietnam and Sri Lanka cannot be ruled out in the coming 15 months, as pointed by our Fair Rating model.

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