Commodity price slump offsets Europe’s ratings rebound

The latest survey from US research and analysis firm IHS Inc offers good news for European economies emerging from recession, but is offset by lower ratings for many of the world’s commodity producers.

Lower prices for oil and a range of other commodities triggered more ratings downgrades for commodity exporters over the third quarter (Q3) of 2015, but a ratings rebound for many European economies meant that the news wasn’t all gloomy, reports HIS.

The firm’s latest survey, conducted by IHS Global Insight’s sovereign risk team, compares and assesses every sovereign worldwide across ratings agencies and focuses particularly on short-term sovereign credit risk.

“Negative rating actions continued to predominate in Q3, with 43 downgrades and only 26 upgrades,” said Jan Randolph, director of sovereign risk at IHS Global Insight. “Significantly, this negative trend has now extended to other commodity producers, with Latin America and Africa worst affected in Q3 with 14 downgrades in each region.”

However, HIS also reports that the European periphery ratings rebound first began in 2013, led by Ireland, Spain and then Portugal as their battered economies emerged from recession, is continuing. Ireland and Portugal again featured in a total of 17 upgrades in Europe during Q3 2015, which also included Slovenia, Cyprus, Latvia, Bulgaria, Malta and Iceland.

“All 17 upgraded countries have shown a renewed vigour of gross domestic product [GDP] growth, and that has been hugely supportive of the ratings rebound,” Randolph said.

The Philippines and Bolivia shine

While Europe provided much of the good news in the Q3 report, the study of Asia showed the Philippines as a star performer. “The Philippines has been on a long ratings upgrade trajectory over the last few years,” said Randolph.

Benigno Aquino III became 15th president of the Philippines in June 2010, with a mandate to tackle poverty and corruption. His six-year term of office will conclude next year.

“The key driver to these upgrades has been successively strong current account surplus generation, with new found sources in export earnings other than workers’ remittances and lower energy import bills,” added Randolph. “However, the latest upgrade in Q3 rests on improved governance standards and reforms enhancing competitiveness under the Aquino administration.”

“A significant improvement in gauges of corruption, transparency, and economic freedom underpinned the improved governance rationale for this outlook upgrade to positive; while the investment grade remained at BBB- or 40/100.”

IHS’s study of South America notes that most of the region’s significant energy producers (Venezuela, Colombia, Argentina and Brazil) – as well as Trinidad and Tobago in the Caribbean – have experienced some negative rating action over the past 12 months, with energy and commodity prices under pressure since mid-2014.

However, Bolivia has managed to avoid this negative rating impact from the falling commodities trend. In relative terms, Bolivia is a more recent energy exporter, whose increased capacity and production is not set to peak until 2019. Many years of hydro-carbon, especially gas-based economic growth and current account surplus generation, has transformed the country’s liquidity and solvency metrics for the positive, such that external and domestic debt has been lowered to modest levels.

“Foreign exchange reserves now comfortably exceed public external debt; making the country a ‘net creditor nation’,” Randolph said. “Bolivia’s economy now faces the sharp drop in hydrocarbon prices, but from a position of relative strength.”

Trouble for BRIC members

Brazil and Russia, two of the world’s biggest energy and commodity producers suffered further downward ratings pressure in Q3, as some agencies took a significant step in lowering their ratings from investment grade back into speculative, IHS reports. “Fiscal budgets in both countries are under review given revenue shortfalls, with capital investment programmes most at risk,” Randolph said.

There were also a total of 14 downgrades across sub-Sahara Africa over the same period – although HIS stresses that, despite the difficult overall growth and commodity export picture, there is still considerable growth variation across the sub-Sahara region.

In most low-income countries, growth is generally holding up, supported by infrastructure investment and private consumption. Countries such as Cote d’Ivoire, Ethiopia, and Tanzania are expected to grow at 7% or more this year and in 2016.


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