Europe, Middle East and Africa (EMEA) corporates’ cautious financial strategies are of less and less help in avoiding downgrades, according to Fitch Ratings. The credit ratings agency (CRA) expects downgrades to outnumber upgrades among Fitch-rated EMEA corporates in 2013.
Fitch reports that the trailing three-month aggregate of revisions to outlooks and rating watches, traditionally a fairly good predictor of future rating changes, dropped towards the end of 2012. This suggests that rating actions will remain net negative in 2013. In addition, the trend has been towards rating actions driven by weaker fundamental performance, rather than more aggressive financial policies, merger and acquisition (M&A) activity or capital expenditure (capex).
This limits event risk – financial policy has been a much bigger downgrade driver in the US, for example – but gives issuers less flexibility to avoid rating action, as 2012’s downgrade numbers (double those for 2011) illustrated.
Utilities and telecom companies accounted for 61% of downgrades in 2012 and the outlook for both sectors remains negative this year. For utilities this reflects weak fundamentals and regulatory pressure across most of the EU. Telecoms face a difficult mix of weaker consumer confidence and strong competitive pressure.
Other sectors with a negative rating outlook include European food retailers, where the biggest operators face a challenge to their business models from changing consumption patterns. Steel producers in western Europe also have a negative outlook due to low demand from the key construction and automotive markets.
CEE’s Fiscal Funding Needs below Eurozone’s
Separately, Fitch said that the larger Central and Eastern European (CEE-4) countries will need to borrow €86bn in 2013 to finance fiscal deficits and roll over existing debt. This equates to about 10% of gross domestic product (GDP), down from 12% in 2012, against a eurozone average of almost 15% of GDP in 2013.
In its report, entitled
‘2013 CEE Governments’ Funding Needs’
, the CRA said that all CEE-4 countries bar the Czech Republic (which was affected by a large one-off factor) are estimated to have run lower general government budget deficits in 2012 than in 2011. This reflects a strong commitment to fiscal consolidation, despite poor prospects for economic growth. In 2013 Fitch expects CEE-4 to run low budget deficits, partly reflecting enhanced fiscal surveillance at the EU level.
CEE-4 fiscal fundamentals stand in marked contrast to the eurozone, where deficits, debt and fiscal financing needs are significantly higher. Better fiscal fundamentals and ample international liquidity suggest CEE-4 should have little difficulty funding 2013 gross borrowing requirements (GBRs), barring major surprises. However, the eurozone outlook dominates and there are major uncertainties in relation to growth which in turn pose upside risks to CEE-4 budget deficits in 2013.
Providing some relief is a relatively light external foreign exchange (FX) bond redemption schedule. Poland and Czech Republic have carried out significant pre-financing of their 2013 GBRs. Hungary and Romania will be looking to refinance redemptions to official creditors in the market. Hungary successfully refinanced in the domestic market in 2012, but Fitch expects it to go to the international capital market in 2013.
Hungary and Romania owe large sums to the International Monetary Fund (IMF) from 2013, as the loans received during the 2008-09 global financial crisis come due. Romania’s relations with the Fund are good, and it is likely to obtain a new precautionary IMF deal when the current one expires in March 2013. Hungary’s relations with the IMF are poor and Fitch considers a new deal unlikely, barring limited external market access. The renewal of Poland’s Flexible Credit Line, worth around US$30bn and due to expire in early 2013, would represent an important backstop in the event of market turbulence.
Fitch maintains stable outlooks on the CEE-4. Market perceptions of CEE-4 sovereign risk, as captured by credit default swap (CDS)-implied ratings calculated by Fitch Solutions, improved over 2012, outperforming eurozone peripherals in some cases, and all CEE-4 enjoyed significant yield compression. Major central banks’ liquidity operations played a key role in easing risk aversion, but so did resolute commitment to fiscal consolidation. Combined with Fitch’s assessment of GBRs, this would suggest that CEE-4 sovereign ratings are unlikely to change in 2013.
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