Emerging Markets Sovereign Rating Trends Mid-Year 2016

S&P Global Ratings
Written By: Moritz Kraemer
S&P Global Ratings
Written By: Moritz Kraemer

S &P Global Ratings publishes an emerging markets sovereign ratings outlook twice a year, including rating and outlook trends as well as sovereign-specific summaries. Other regional reports cover Asia-Pacific, the eurozone, Central and Eastern Europe, Commonwealth of Independent States, Latin America and the Caribbean, Middle East and North Africa, and Sub-Saharan Africa. The next sovereign rating outlooks will be published in January 2017. You will find the current set of sovereign trend publications and videos on spratings.com/sovereignoutlook.

Rating Outlook And Trends

Overall sovereign creditworthiness in the top-20 emerging markets (EMs) across the world has remained broadly stable over the past five years. The share of EM sovereigns with investment-grade ratings ('BBB-' or above) has declined to 50%, the lowest point since 2009, after peaking at 60% between May 2013 and December 2014 (see chart 1). The decreased proportion of investment-grade EM sovereigns since December 2014 follows our downgrades of Russia in January 2015 and Brazil in September 2015. Our outlooks on nine EM sovereign ratings are stable, while the number of negative outlooks has increased by three to nine in the past six months, compared with just two positive outlooks. The nine negative outlooks on the top-20 EM sovereigns is the highest number on record (on a par with the mid-2009 peak).

In this report, S&P Global Ratings covers the 20 EM sovereigns with the highest absolute levels of outstanding commercial debt. All ratings referred to in this report are long-term foreign currency sovereign credit ratings.

 

Overview

  • The negative outlook bias has continued to deteriorate since year-end 2015 and negative outlooks among the 20 major emerging market sovereigns now outnumber positive ones by nine to two.
  • We currently have negative outlooks on seven countries: Brazil, China, Colombia, Egypt, Lebanon, Poland, Russia, South Africa, and Venezuela.
  • The average unweighted sovereign rating of our EM sovereign group has strengthened from previous lows after our upgrade of Argentina to 'B-' from 'SD'.

Since 2010, the 'BBB' category has included the largest number of EM sovereigns, currently eight, followed by 'BB' with five. China has the highest rating of the EM countries covered in this report, at 'AA-'. Since December 2010, two countries have received investment-grade ratings: Colombia in March 2011 and the Philippines in May 2013. Hungary joined the group of speculative-grade sovereigns (rated 'BB+' or below) in 2011, as did Russia in January 2015 and Brazil in September 2015. We downgraded Venezuela on Feb. 9, 2015, to 'CCC', which is the lowest rating in our EM group. Argentina was in selective default (SD) between July 30, 2014, and May 6, 2016, which was the first default among EM sovereigns in almost a decade. The rating on Venezuela is currently 'CCC' with a negative outlook, indicating a substantial default risk in 2016, just over 10 years after Venezuela's last sovereign default.

We took the following rating actions in the first half of 2016:

  • Argentina upgraded to 'B-' on payment of past-due interest on exchange bonds on May 6;
  • People's Republic of China outlook revised to negative from stable on slower economic rebalancing on March 31;
  • Brazil downgraded to 'BB' on significant political and economic challenges on Feb. 17;
  • Colombia outlook revised to negative on external weakness on Feb. 16;
  • Egypt outlook revised to negative on economic and fiscal financing pressures on May 13;
  • Poland downgraded To 'BBB+' from 'A-' on weakening institutions on Jan. 15; and
  • Turkey outlook revised to stable on economic resilience on May 6.

The ratings on EM sovereigns have become somewhat more disparate over the long term. Most of the ratings are still in the 'BBB' and 'BB' categories (65% on June 30, 2016), but this proportion was 70% until mid-2011. That share rose again in January 2016 following Poland's downgrade to 'BBB+' from 'A-' and the upgrade of Argentina to 'B-' from 'SD'. The number of EM sovereigns rated in the 'B' or 'CCC' categories has increased correspondingly to 25% of the total from 15% at midyear 2011, reflecting the deterioration of credit quality of EM sovereigns rated in the lower end of the group range. Before our upgrade of China to 'AA-' in 2010, no top-20 EM had a rating above the 'A' category. The negative outlook we assigned to China in March 2016 reflects our view of gradually increasing economic and financial risks to the government's creditworthiness, which could result in a downgrade this year or next. Lowering the rating on China would mean that EM sovereigns vacate the 'AA' category.

The unweighted average rating on EM sovereigns has been on a gradually declining trend over the past five years (see chart 2). It peaked at less than half a notch below 'BBB-' at midyear 2011. However, the downgrade of Venezuela to 'B-' from 'BB-' in August 2011 marked the start of a gradual deterioration toward an average below 'BB+', below the levels at the height of the 2009 global financial crisis. Although positive rating movements have halted this trend a few times (for example, the upgrades of the Philippines in May 2014 and Hungary in May 2015), the overall trend has remained negative. Before Argentina emerged from default in May 2016, lifting the unweighted average sovereign rating of the EM group, the average had hit its lowest level since mid-2005.

The average rating weighted by GDP is much higher, to a large extent due to highly rated China, which accounts for more than one-third of the sample's GDP. The slight uptick in the GDP-weighted average ratings in 2006, 2008, and 2010 we see in chart 2 follows our successive upgrades of China, whereas the dip in 2014 is due to the lowering of our ratings on Brazil and Russia, two economic heavyweights.

Looking ahead, our nine negative outlooks on Brazil, China, Colombia, Egypt, Lebanon, Poland, Russia, South Africa, and Venezuela now firmly outnumber our two positive outlooks on Indonesia and Pakistan (see chart 3). Since March 2012, the number of negative outlooks exceeded positive ones for only a brief two-month period in mid-2015, which ended with our revision of the outlook on Brazil to negative. Our rating outlooks are intended to indicate our view of the potential direction of a long-term credit rating, typically over six months to two years for investment-grade ratings and six months to one year for speculative-grade ratings. A positive or negative outlook is intended to designate at least a one-in-three likelihood of a rating change in the indicated direction.

 

 

 

EM Sovereign Rating Assessments

We assess five overarching factors to determine a sovereign credit rating, in accordance with our "Sovereign Rating Methodology," published Dec. 23, 2014. For the 20 countries covered in this report, we summarize the relative strengths and weaknesses of the factors that contribute to the level of our sovereign ratings in table 1. We assess these contributing factors as a strength, neutral, or a weakness in relation to the universe of all rated sovereigns, rather than with respect to the more limited sample of EM sovereigns alone. The wide distribution of these assessments among the EM sovereigns indicates a diverse group.

Nevertheless, a number of characteristics unite EM sovereigns. Our economic assessment indicates that no EM sovereign covered here displays an economic structure that could be considered a strength. This reflects, above all, these countries' still relatively modest wealth compared with that of advanced economies. For half of the sample, economic structure and growth therefore remain a weakness (see last data row of table 1). The overall institutional assessment is also somewhat weaker than for the most advanced sovereigns, although we consider it to be an outright weakness for less than one-third of the sample. The diversity of the external assessments reflects the wide array of performances in terms of external financial flows, ranging from major commodity exporters to nonresource economies that are heavily reliant on external financing. This is to some extent confirmed by the different monetary flexibility assessments, owing to very dissimilar exchange-rate regimes, stages of financial system development, and track records and credibility levels of the sovereigns' central banks. We consider monetary flexibility a strength for only three EM sovereigns: South Africa, Poland, and Malaysia.

Another notable pattern is that, on average, the fiscal flows are weaker than fiscal stocks (the opposite is often the case in advanced economies). In our opinion, current budgetary performance is a strength only for China and Turkey, while we see it as a weakness for eight EM sovereigns. On the other hand, the fiscal debt burden is a strength for four EM sovereigns--China, Indonesia, Russia, and Thailand--while it is a weakness for only five: Brazil, Egypt, India, Lebanon, and Pakistan). The stronger assessment of EMs' government debt burden in relative terms, however, may partly reflect the more limited debt tolerance of many EMs compared with advanced economies, which often have higher public net debt as a share of GDP.

Since our last EM sovereign rating trends report (with a cut-off date of Dec. 31, 2015), we have not changed the institutional or monetary assessments for any of the 20 sovereigns. We now consider Lebanon's economic assessment as weak, versus neutral at year-end 2015. Our external assessment for Hungary is now strong compared with neutral previously. Turkey is the only sovereign for which we consider the fiscal budgetary assessment to be a strength since we changed this assessment for China to neutral from a strength in March. Lastly, we revised Venezuela's fiscal debt assessment to a weakness, down from neutral. With this change, Venezuela has joined Egypt in the small and unenviable group of sovereigns where we consider each factor to be a weakness. Ukraine and Belize are the only other rated sovereigns that fall into the same group.

Emerging Markets Sovereign Rating Strengths And Weaknesses
Issuer Sovereign foreign currency rating Institutional assessment Economic assessment External assessment Fiscal assessment: budget performance Fiscal assessment: debt Monetary assessment

Argentina

B-/Stable/B Weakness Weakness Weakness Weakness Neutral Weakness

Brazil

BB/Negative/B Neutral Weakness Neutral Weakness Weakness Neutral

China

AA-/Negative/A-1+ Neutral Neutral Strength Neutral§ Strength Neutral

Colombia

BBB/Negative/A-2 Neutral Neutral Neutral Neutral Neutral Neutral

Egypt

B-/Negative/B Weakness Weakness Weakness Weakness Weakness Weakness

Hungary

BB+/Stable/B Neutral Neutral Strength* Neutral Neutral Neutral

India

BBB-/Stable/A-3 Neutral Neutral Strength Weakness Weakness Neutral

Indonesia

BB+/Positive/B Neutral Weakness Neutral Neutral Neutral§ Neutral

Lebanon

B-/Negative/B Weakness Weakness§ Neutral Weakness Weakness Weakness

Malaysia

A-/Stable/A-2 Neutral Neutral Strength Neutral Neutral Strength

Mexico

BBB+/Stable/A-2 Neutral Neutral Strength Neutral Neutral Neutral

Morocco

BBB-/Stable/A-3 Neutral Weakness Neutral Neutral Neutral Neutral

Pakistan

B-/Positive/B Weakness Weakness Neutral Weakness Weakness Neutral

Philippines

BBB/Stable/A-2 Neutral Weakness Strength Neutral Neutral Neutral

Poland

BBB+/Negative/A-2 Neutral Neutral Neutral Neutral Neutral Strength

Russia

BB+/Negative/B Weakness Weakness Neutral Neutral Strength Neutral

South Africa

BBB-/Negative/A-3 Neutral Weakness Neutral Weakness Neutral Strength

Thailand

BBB+/Stable/A-2 Neutral Neutral Strength Neutral Strength Neutral

Turkey

BB+/Stable/B Neutral Neutral Weakness Strength Strength* Neutral

Venezuela

CCC/Negative/C Weakness Weakness Weakness Weakness Weakness§ Weakness
Strength (%) 0 0 35 5 20 15
Neutral (%) 70 45 45 55 50 65
Weakness (%) 30 55 20 40 30 20
Ratings as of June 30, 2016. *Improvement since December 2015. §Deterioration since December 2015.

Emerging Markets Economic Outlook
Real GDP growth (%) GG balance/GDP (%) Net GG debt/GDP (%) Current account balance/GDP (%) Narrow net external debt/CARs (%)
2016 2017 2016 2017 2016 2017 2016 2017 2016 2017

Argentina

(1.0) 3.1 (6.0) (4.9) 43.8 40.9 (2.8) (1.1) 186.7 175.0

Brazil

(3.6) 1.0 (10.8) (9.0) 60.2 66.2 (1.1) (1.1) 9.5 11.3

China

6.3 6.1 (3) (2.8) 42.0 43.0 3.1 2.5 (96.0) (90.7)

Colombia

2.3 3.0 (3.3) (2.6) 36.4 36.5 (6.1) (5.1) 102.4 108.1

Egypt

3.0 3.5 (11) (10.8) 82.7 83.9 (4.9) (5.2) 40.6 61.5

Hungary

2.4 2.0 (2.4) (2.3) 73.3 73.1 4.6 3.2 34.0 29.9

India

7.9 8.0 (7.0) (6.7) 67.9 67.8 (1.6) (2.2) 24.4 27.0

Indonesia

5.1 5.3 (2.7) (2.8) 25.3 25.8 (2.6) (2.9) 88.4 89.4

Lebanon

1.0 2.0 (8.7) (8.7) 126.0 128.7 (17.3) (17.9) (71.5) (65.9)

Malaysia

4.5 4.7 (4) (3.8) 50.5 50.2 1.3 2.2 (12.8) (13.9)

Mexico

2.5 2.9 (2.8) (2.8) 44.9 45.4 (2.3) (2.6) 46.9 47.0

Morocco

1.8 3.5 (3.5) (3) 52.1 52.1 (2.2) (2.2) 38.0 37.6

Pakistan

4.5 4.7 (3.9) (3.3) 56.1 54.6 (1.1) (1.6) 76.8 72.5

Philippines

6.1 6.3 (1) (1) 19.8 19.1 2.6 2.4 (20.4) (18.8)

Poland

3.5 3.2 (3.0) (3.2) 49.7 50.6 (0.2) (0.6) 55.9 54.8

Russia

(1) 1.4 (4.4) (3.7) 5.5 8.7 4.1 4.6 (54.5) (54.2)

South Africa

0.6 1.5 (3.3) (2.9) 47.5 48.3 (4.2) (4.1) 46.5 48.0

Thailand

3.2 3.2 (1) (0.7) 23.0 24.4 8.4 8.3 (22.3) (29.0)

Turkey

3.4 3.4 (1.7) (2.5) 27.3 27.2 (4.5) (4.6) 140.5 147.8

Venezuela

(7.5) (1) (24.0) (24.4) 53.7 59.4 (1.7) (1.6) 282.2 261.3
GG--General government. CARs--Current account receipts.