Fitch Says Risk of Downgrades Spreading Among Developing Nations

Job seekers wait in line at an employment fair in Rio de Janeiro, Brazil.

Job seekers wait in line at an employment fair in Rio de Janeiro, Brazil.

Photographer: Dado Galdieri/Bloomberg
  • Brazil, South Africa top list on slowing growth, Fitch says
  • Saudi Arabia, Gulf nations must cut budgets to preserve rating

Brazil and South Africa top a list of emerging-market borrowers whose credit ratings are threatened by slowing growth and ballooning budget deficits, according to Fitch Ratings.

Credit grades across Latin America are also under pressure as the down cycle in commodity prices deepens and stagnation in Brazil’s economy pushes the entire region into contraction, Shelly Shetty, a senior director for sovereigns at Fitch, said in a conference in London Tuesday. In South Africa, the main threats are reduced long-term growth potential and fiscal slippage, said Carmen Altenkirch, a London-based director in Fitch’s sovereign group.

While a potential increase in U.S. interest rates this year and China’s surprise devaluation of the yuan in August have spurred an exodus from emerging-market assets in recent months, Fitch sees longer-term and deeper challenges in the form of worsening domestic fundamentals. In Brazil, President Dilma Rousseff is grappling with above-target inflation, the highest interest rates since 2006, a corruption scandal involving state-run Petroleo Brasileiro SA and a recession projected to be the longest since 1931.

“The main risks to Brazil’s investment-grade rating are weak growth, fiscal challenges and debt dynamics,” Shetty said at Fitch Ratings’ Global Sovereign Conference. “The political risks of the president losing popularity and Petrobras investigations are clouding the agenda of the government.”

Fitch officials also commented on the following governments:

South Africa

“Since we put South Africa on negative outlook in December 2014, the news flow coming out of the country has largely been negative,” Altenkirch said, citing “contractions in the mining and manufacturing sectors driven by electricity shortages, challenges from lower commodity prices and continued challenges in terms of implementing the national-development plan.”

Persian Gulf

Saudi Arabia, Iran, Bahrain and Iraq need to cut government spending to preserve ratings in an environment of falling oil prices, said Paul Gamble, a senior director for sovereign ratings.

Turkey

Fitch will review Turkey’s credit rating next week, assessing whether policy and political conditions have deteriorated and how it will respond to higher Federal Reserve interest rates, Gamble said.

While the nation’s current-account deficit hasn’t narrowed as much as Fitch would have liked, its strong public finances and lower debt as a percentage of gross domestic product is a big support to the nation’s rating, he said.

Russia

Fitch expects international sanctions tied to the country’s role in the Ukraine conflict to remain in place, which could become a source of pressure to the nation’s companies in 2017 when debt-servicing obligations increase, said Charles Seville, a senior director at Fitch. Even so, the government’s low debt justifies its investment-grade status.

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