A Fitch Ratings report on the Europe, Middle East and Africa region forecasts that emerging market (EM) corporates’ key credit metrics will weaken, but remain slightly stronger than those of their developed market (DM) counterparts in 2014 and 2015.
The credit ratings agency (CRA) says that slowing growth, high capital investment levels, persistent structural imbalances, sanctions imposed on Russia following the political turmoil in Russia/Ukraine and vulnerability to foreign exchange (FX) volatility will conspire to pressure EM corporates’ cash generation and limit rating headroom in the near term.
Fitch believes that developed Europe has turned a corner, and it expects economic growth to continue the gradual recovery observed since mid-2013. Conversely, corporates operating in emerging economies are facing increased headwinds. The growth differential between DMs and EMs has narrowed to the closest level in a decade.
While DM corporates are expected to gradually deleverage in 2014 and 2015, EM corporates have limited scope to reduce debt in the face of rising pressure on cash generation – notably as EM capital expenditure (capex) is forecast to remain high – much of which will need to be funded through debt.
FX risks and volatility also escalated in early-2014 following the tapering of the US Federal Reserve’s quantitative easing (QE) programme, effectively ending an influx of cheap capital enjoyed by EMs in recent years.
This resulted in hot money outflows and double-deficit (current account and fiscal deficit) countries – Brazil, India, Indonesia, South Africa, and Turkey – have been the biggest casualties. Turkish corporates are considered most exposed given low levels of hedging, while double-digit currency depreciations also ensnared Russia, Kazakhstan and Ukraine.
At end-June 2014, 22% of EM EMEA issuers’ ratings were on negative outlook, compared with only 12% of DM issuers. This follows a spate of negative rating actions for EM issuers in Q413 and Q114, driven both by fundamental factors, the downgrade of the Ukrainian sovereign rating in November 2013 and February 2014, and the revision of the outlook on the Russian Federation to negative in March.
‘Emerging Versus Developed EMEA Corporates’
, is available on www.fitchratings.com.
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