Rating Downgrades’ Descent Defiance
Emerging market corporate and sovereign ratings will stay at the BBB investment grade average despite recent downgrade tendencies as the developed world convergence pattern holds according to leading index provider JP Morgan. The three main agencies now assign the mark to 40 percent of the $55 trillion in outstanding global securities, double the pre-crisis portion. The separate EMBI, CEMBI and GBI benchmarks are all majority prime quality, and half the Eurozone is at BBB and below. The external sovereign improvement trend could be slowed by the entrance of frontier issuers accounting for almost one-fifth of supply this year, while the corporate space is shielded by the 50 percent quasi-sovereign component the past five years with 75 percent government ownership to cover liabilities. Half of developing economies are investment-grade rated with government debt at 25 percent of GDP versus the 90 percent peripheral Europe norm. EMBI downgrades have outpaced upgrades since 2013 with Costa Rica, Croatia and Tunisia losing high-grade status while important elevations included Romania, the Philippines and Turkey. The local currency index has an 80 percent BBB+ overall rating and where the position is at risk as with negative outlooks for Brazil and India the general trend is unchanged even under worst case scenarios. European monetary union scores have steadied after a three-notch drop as only Finland, Germany and Luxembourg retain unanimous AAA. Of the $1.5 trillion in corporate debt tracked, 70 percent is at the threshold with the financial and hydrocarbon sectors representing 80 percent of the CEMBI Broad, according to its creator. In Europe and Latin America rating ratios are negative, while Asia’s is neutral. Flagship emerging market companies like Petrobras, CNOOC, and America Movil are also one-tenth of the US high-grade and high-yield indices, but institutional investors such as insurers remain underweight.
Developing country bank standing should further gain against advanced economy counterparts as US and EU official support is withdrawn under the respective Dodd-Frank and single resolution mechanism rules. The former entails steeper capital and liquidity ratios than in Basel III formulas for major groups and the latter sets compulsory bondholder “bail-in” provisions as of January 2016. Dozens of European bank outlooks have gone negative after the directive as the ECB asset review and stress test may reinforce the tendency. The initial LTRO take-up of EUR 80 billion out of an available EUR 400 billion mostly by Italian and Spanish lenders otherwise shut out of interbank lines may reflect caution ahead of the results. Spain’s Santander reaffirmed its Latin America diversification strategy after the daughter of founder Botin became chief executive after his death, despite the potential defeat of Brazil’s incumbent President with the candidate Silva’s surge in opinion readings and near-recession as Moody’s cited “marked deterioration” in investor sentiment. Mexico’s growth may be just 2 percent as Pemex private opening will not translate into ventures until at least next year as interested partners downgrade expectations.
