Double trouble for Russia as falling oil prices and sanctions cause 25 percent drop in currency; USA and peripheral Europe among biggest winners
Thursday, November 13, 2014 5:00 am EST
"In contrast to their larger Latin neighbors, Peru, Colombia, Uruguay, Paraguay and Bolivia have all been upgraded"
LONDON, UK (13 November, 2014) – According to research conducted by IHS Inc,. (NYSE: IHS), the leading global source of critical information and insight, drops in oil and commodity prices along with weaker growth caused the ‘net positive’ sovereign risk ratings surge seen in the first three quarters of 2014 to slow down.
The IHS study shows that globally, over the past 12 months, 100 sovereigns have been upgraded and 68 downgraded, compared to the 92 upgrades and 114 downgrades in 2013. Ratings were gathered from S&P, Fitch, Moody’s and IHS.
“While some countries are going to see a boost in the year ahead, weaker growth and declining commodity prices now undermine key sovereign ratings,” said Jan Randolph, director of sovereign risk at IHS Economics.
Russia and Brazil Hit Hardest
The ratings outlook continues to darken for Russia and those CIS countries closely linked economically.
“Russia is in double trouble,” Randolph said. “It’s not just the slow burn nature of sanctions that are beginning to bite, but the sagging oil price is providing a double-whammy for Russia’s finances and growth prospects.”
If Russian entities cannot roll over or refinance maturing debt and debt-service existing foreign exchange-denominated liabilities in western debt markets because of sanctions, or can only do so at punitive rates of interest, they will have to turn increasingly to Russian banks for alternative avenues to access hard currency credit for debt refinancing.
This refinancing deflection from foreign to domestic financing sources culminates in increasing demands and downward pressures on the central bank’s own foreign exchange reserves, in addition to capital flight.
The Russian rouble is now vying with the Argentinian peso as the world’s worst- performing currency for 2014. Russian attempts to stem these negative trends with rising interest rates have only helped to slam the brakes on domestic growth and re-ignite imported inflation.
Separate paths for South America
The domestic and external growth challenges plaguing South America’s larger economies have masked the more successful smaller and medium sized economies within the region.
Brazil, Argentina and Venezuela have each encountered specific growth challenges during 2014 from a slowing Chinese economy, sagging commodity prices, ebbing of global capital flows, and domestic social and political tensions over reform and economic mismanagement.
“In contrast to their larger Latin neighbors, Peru, Colombia, Uruguay, Paraguay and Bolivia have all been upgraded,” Randolph said. “A common key to these upgrades has been the successful attraction of export-oriented foreign direct investment. This has helped build foreign exchange reserves and pay down external debt; all in the context of relatively good growth rates.”
The Winners: Peripheral Europe, USA & India
The global rise of sovereign risk ratings was led by peripheral Europe, especially Ireland, the Baltics, Portugal and Spain. Cyprus is the latest peripheral European sovereign to start a ratings rebound on decisive policy reform execution.
For a third consecutive quarter, Europe again received the most global upgrades in a quarter, with around a third of total upward global revisions and nearly half of all rating upgrades.
However, all these ratings are still below what they were before the global financial crisis and subsequent global recession.
The gap between surging positive rating actions (30) over negative (13) continued in the third quarter, following 42 upgrades and 20 downgrades in the second quarter and after a slight 'net negative' global ratings balance in the first quarter, with 26 upgrades and 29 downgrades.
Despite the gloomier global growth prognosis, especially in Europe, there has been a 12-month mixed pace rebound in peripheral Europe ratings. Northern European sovereigns that have implemented decisive remedial fiscal action have seen their triple-AAA ratings fully restored, namely the UK and the Netherlands. But, this appears to be coming to an end if growth falters further and as France and Italy now find themselves in the negative spotlight in Europe.
Shale energy revolution could help restore the US’s AAA rating
Now that the shale revolution is spreading to older oil fields, the US can increasingly replace foreign imported energy with domestic. US trade deficits will be much smaller goings forwards.
“As the US trade deficits shrink, in credit risk terms, this means that the US will become less and less indebted to China, Asia and others to finance these deficits,” Randolph said.
This positive energy trend, as well as a lower fiscal deficit, will limit future debt growth and may eventually un-gridlock Congress as key tension issues ease.
The Modi boost
“India’s rating could be on the cusp of further upgrades, if the new Modi government pursues reform and benefits from a much lower oil import bill and inflation,” Randolph said.
A key material improvement to India's fiscal position has been the removal of the diesel fuel subsidy by the new reform-minded government. At the same time, the external current-account deficit has narrowed to its lowest level in six years, as the largest import bill item of oil has started to fall, reaping the benefit of sagging worldwide oil prices.
“A more benign environment could lead to a sustained virtuous circle in India,” he said. “Lower inflation would help to promote a stable currency and, in turn, make it possible for the central bank to cut interest rates, providing a much-needed boost to growth.”
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