The credit overview for 2009 remains bleak, with negative rating trends the order of the day, according to Brian Coulton, managing director, sovereign group at Fitch. For the first time since credit ratings began, the emerging markets ratings’ outlooks are negative across the board; while the advanced economies are experiencing the steepest decline in gross domestic product (GDP) since WWII. Coulton predicts that credit ratings won’t improve until the second half of 2010.
Speaking to over 500 people at Fitch’s Credit Outlook Conference 2009 in December last year, Coulton explained how the consistency of negative outlooks characterises a degree of synchronicity across the world’s markets and that this economic convergence has effectively debunked the theory of decoupling, in short the idea that emerging markets are independently strong enough to withstand following the US into recession. “The interdependence resulting in credit events has been additive, which is an interesting phenomena because it illustrates that the world financial system has proved weaker than the sum of constituent parts,” he said.
In a survey of investors, Fitch discovered that the majority (62%) in the financial industry believed that the economy was still in the middle of the crisis, with only 30% saying that the industry has past the worst, while 58% in the industrial sector felt that the worst was yet to come.
John Hatton, group credit office, corporate finance group at Fitch, agreed that there was still more bad news to come for the corporates and the defaults to date were just ‘drips in a glass’ compared to what is to come. He said the biggest challenge was forecasting through the downturn because no one knows the severity of the downturn – corporates are not getting the guidance they need to make predictions. Hatton looked at key forecasting assumptions, such as:
- Assume 2009 recession with no recovery until mid-2011.
- Effect upon revenue (also capital expenditure-related growth).
- Effect upon costs and margins.
- Review assumed asset sales, equity issuance and working capital assumptions.
- Increased borrowing costs (+200bps) for new/refinanced debt, if available.
- Foreign currency debt.
Gerry Rawcliffe, group credit officer, financial institutions group at Fitch, was not overly optimistic for banks in the short-term, although he believes that 95% of the bank failures have already occurred. He said that the greatest challenges facing European banks were:
- Capital raising required.
- Asset quality deterioration and exposures to emerging markets.
- Earnings’ weakness.
- Liquidity and funding pressures.
Rawcliffe said that most banks’ strategy is ‘back to basics’, although they won’t go back to ‘pre-flood’ utility banking. “Banks will continue to be innovative, if subdued, for the time being. No one is going to escape the stresses as the economic recession hits harder. I believe that the downgrades will run at the same level and then lessen in 2010. Banks that continue to be wedded to pursuit of profits with a disregard for risk will end in tears,” he said.
Fitch predicts the US will see a decline in GDP of -1.2% in 2009; within the euro zone, Germany is predicted to slow down by -0.5%, France by -0.9%, and Spain and the UK are expected to fare the worst with -1.4% decline in GDP. The BRICs (Brazil, Russia, India and China) are predicted to grow by 5.7% in 2009.
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