Fitch: EMs vulnerable to 2016 downgrades

Brazil at risk of a cut to junk

LONDON: Emerging markets face another wave of ratings downgrades next year, with Brazil at risk of a cut to junk and the Africa/ Middle East region potentially given a ‘negative outlook’, Fitch Ratings’ top sovereign analyst said in an interview.

“Depressed commodity prices combined with mediocre global growth and the approach of the first US interest rate rise in almost a decade are posing a threat to the ratings of developing countries,’’ James McCormack, Fitch’s head of sovereigns, told Reuters.

The agency has cut the ratings of 12 commodity exporting emerging economies already this year, and 14 countries, including big names such as Brazil, Russia, South Africa and Nigeria are currently on downgrade warnings — or negative outlooks in rating agency parlance. Next year looks likely to be a similar story.

“I think that is a pattern we are going to continue to see into next year,” McCormack said.

“The Middle East and Africa is the region that will see the most downgrades. We have never had this region on negative outlook (where more than 20% of sovereigns have negative outlooks), but it is something we could do.”

For investors, one of the most pressing issues is that many of the big emerging markets are now teetering on the cusp of junk status after roughly a decade of investment grade benefits.

Fitch is the only one of the big three rating agencies that classes Russia as investment grade. All eyes are also on it to see if it follow S&P and cuts Brazil, also at the lowest investment rating BBB-, to junk.

Such a move could wipe over $20 billion off the value of Brazilian bonds, JPMorgan has predicted.

“Brazil looks to be the most vulnerable (to losing investment grade),” McCormack said, citing the country’s lack of fiscal consolidation as the biggest cause for concern.

“We will look at it again in early 2016. When things are deteriorating we need to look more frequently. It has only been a couple of months (since the last downgrade in October) but so far we haven’t really seen any improvement.”

Ranked a notch higher at BBB, South Africa, which is seeing growth sapped by the commodity slump, inflation and electricity problems, is suffering “a slow and steady deterioration” in its finances.

“In some respects Russia looks the least vulnerable, to losing investment grade,’’ McCormack said, adding its response to the low oil prices has been better than AA Saudi Arabia’s “rather modest” cuts to its budget.

For Europe, the biggest risk for 2016 is that fiscal consolidation fatigue would set in, rather than the rising tensions over the flood of Syrian refugees. A British vote to leave the European Union is another potential risk.

McCormack said it was too early to say what an exit from the EU would mean for Britain’s relationship with Europe and its AA+ rating.

“Meanwhile, Portugal, which has just ousted its government, could see its current ‘positive’ outlook pushed back to stable if fiscal consolidation starts going in the opposite direction,” he warned.