Fitch Ratings-London-10 November 2008: Following the conclusion of its global review of the sovereign ratings of 17 major investment-grade 'emerging market' economies, Fitch Ratings has today downgraded the sovereign ratings of Bulgaria, Hungary, Kazakhstan and Romania. The ratings Outlook for South Africa and Russia have also been revised from Stable to Negative. Full details of all the sovereign rating actions in EMEA (Europe, Middle East and Africa) can be found at the end of this announcement.
Emerging Europe is the most vulnerable Emerging Market region to the deterioration in the global financial and economic environment owing to the presence in many countries of large current account deficits and relatively high levels of short-term external debt. This renders them susceptible to reduced capital and financial market flows (including from foreign parent banks). Other factors that increase the region's vulnerability are the presence of significant currency mismatches on balance sheets, their relative trade openness and, in the case of Kazakhstan and Russia, their exposure to the fall in commodity prices.
Since the onset of the credit crunch in August 2007, Fitch has downgraded the foreign currency ratings of nine countries in emerging Europe by a total of 11 notches, compared with just three upgrades. Moreover, eight countries are now on Negative Outlooks - a record level for the region - while no countries are on Positive Outlooks, signalling that ratings remain under downward pressure.
Hungary: the downgrade reflects the severity of the recession and post-crisis correction to macroeconomic imbalances and associated risks to the public finances and from foreign currency mismatches in the private sector. However, the EUR20bn IMF-led package of support has largely removed external financing and liquidity risks, supporting Fitch's Stable Outlook.
Bulgaria: the downgrade reflects the increasing risk of a recession in response to a marked decline in external financing flows, which will necessitate a sharp contraction in domestic demand to rein in the current account deficit. However, given the strong sovereign balance sheet - large fiscal reserves mean that government net financial liabilities are virtually zero - and the broad-based commitment to the currency board arrangement (CBA), Fitch believes the risk of recession broadening into a deeper economic and financial crisis over the medium-term is limited and consistent with a Stable Outlook.
Romania: the two-notch downgrade reflects Fitch's concerns about the macroeconomic policy framework in Romania and its ability to avoid a severe economic and financial crisis. With a widening current account deficit - expected to exceed 14% of GDP this year - fuelled by excessive credit growth, Fitch believes a much stronger policy adjustment, especially in fiscal policy, is needed to avoid a currency crisis. Given private sector foreign currency balance sheet mismatches, such an outcome could require substantial external financial support from the international community to prevent a sovereign credit crisis. The rating Outlook is Negative.
Kazakhstan: although the strength of the sovereign balance sheet continues to justify its investment-grade status - it is a net creditor with very little foreign currency debt - its capacity to manage its domestic banking crisis has been weakened by the global financial crisis and decline in commodity prices, warranting a downgrade by one notch and a Negative Outlook. Despite extensive support measures taken by the Kazak authorities, bank asset quality is deteriorating following the abrupt halt to capital inflows last summer and a sharp correction of the property market. Banks are a large contingent liability for the government and the provision of support to them as well as the commitment to the stability of the Tenge in the highly dollarised economy and against the backdrop of lower oil prices will potentially drain sovereign foreign assets and weaken its balance sheet.
Russia: the sovereign's exceptionally strong balance sheet gives it the capacity to take measures to stabilise the banking system and effectively finance the repayment of the corporate and banking sectors' external and foreign currency liabilities. However, its room for policy manoeuvre is constrained by the risk of deposit and capital flight, the systemic weakness of the banking system and relatively high inflation. Moreover, the decline in commodity prices will also adversely affect the sovereign balance sheet and complicate the policy response given the consequent downward pressure on the rouble real exchange rate.
South Africa: the ratings are supported by the a relatively strong banking system - in contrast to other countries, banks have not required sovereign financial support - and robust macroeconomic policy framework including a free floating exchange rate. The South African Reserve Bank has not intervened in the currency markets to support the rand and the economy is largely free of currency mismatches in private sector as well as sovereign balance sheets. However, the current account deficit in excess of 7% of GDP, which is largely funded by portfolio flows, means the risk of a 'hard landing' and even recession has increased significantly given the expected reduction in capital and financial flows to emerging markets. Moreover, the policy challenges are exacerbated by still relatively high inflation and in the event of a recession, the political commitment to the current macroeconomic policy framework could be tested.
To accompany today's global review, the Sovereign group will host a teleconference at 15:00 GMT/ 10:00 EST to discuss the review in further detail. A full list of rating actions and associated rationales are detailed in a special report, 'Rating Review of Emerging Markets', now available at www.fitchratings.com |
