‘Malaysia and SA deserve to be junked’
SIX developing nations, including Malaysia and South Africa, deserve to follow Brazil into junk status, if credit default swops (CDS) traders are to be believed.
Two weeks after the South American country lost its investment grade at one of the three major ratings providers, CDS investors are punishing other emerging markets facing similar challenges, sending their implied ratings at least five levels below their official grades, according to data from Moody’s. Malaysia is A3 at the company, though traders see it six levels lower at Ba3.
South Africa, which is a Baa2, is viewed as a B1 borrower. Three Aa3 nations, including China, are perceived by the markets as deserving the lowest investment grade.
Most developing nations are confronting the same issues that saw Brazil lose its investment grade rating at Standard & Poor’s – a plunge in commodity prices, a slumping currency and political turmoil.
Sputtering growth in China and the prospect of higher US interest rates are also boosting concern of more downgrades across emerging markets.
Having been censured for laxity during previous market meltdowns, the ratings providers would not want to be caught failing to act this time around, Per Hammarlund of SEB said.
“The deterioration in commodity dependent economies’ credit-risk metrics can lead to more downgrades in emerging markets in the next three to six months, if not earlier,” said Hammarlund, the chief emerging markets strategist at SEB in Stockholm.
“The rating agencies were roundly criticised for being slow to react during the 2008 crisis, as well as the 2011 euro zone crisis. They are going to be much more trigger happy this time.”
While investors do not always agree with official grades, the gaps for these nine coun- tries are some of the biggest among the 65 borrowers tracked by Moody’s implied ratings model, which is based on CDS prices as of September 21, compared with peers in the same ratings category.
While the investors’ everchanging opinions are not an input into the ratings decisions, the company’s analysts study them to understand why the gaps exist, according to Moody’s.
“Market-implied ratings tend to ‘lead’ Moody’s ratings, given financial markets’ propensity to instantaneously incorporate information,” Irina Baron, an assistant director at Moody’s Capital Markets Research Group, said.
Finance ministry officials in Chile and Malaysia did not respond to requests for remarks. A National Treasury spokeswoman in South Africa declined to comment. Middle Eastern and Turkish governments were closed for the Eid holiday.
“Calculating an implicit market rating based on the price of CDS as a proxy to measure the fundamental credit rating of a country is not appropriate,” Peru’s finance ministry said. – Bloomberg
Three Aa3 nations, including China, are perceived… as deserving the lowest investment grade.