‘Malaysia and SA de­serve to be junked’

The Star Early Edition - - INTERNATIONAL - Lyubov Pron­ina

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.

Same is­sues

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.

In­for­ma­tion

“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.

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