Emerging Market Downgrades Loom With Debt Cliff, S&P Warns

  • Governments footing corporate bailouts coming under pressure
  • Energy companies most at risk after `prolific' borrowing

Emerging markets from the Gulf to Russia are under threat of sovereign ratings downgrades as public companies struggle to meet rising debt loads, S&P Global Ratings warned.

Governments that need to bail out state-owned businesses could face economic weakness, an erosion of revenues and pressure on external accounts, the rating firm said in a report published on Wednesday. Their debt burdens, or contingent liabilities, pose “new potential risks” to sovereign ratings, S&P said.

"Contingent liabilities crystallizing on a government’s balance sheet have so far not played an important role in the negative ratings trajectory of EM sovereigns," said Moritz Kraemer, global sovereign chief ratings officer at S&P in Frankfurt. "This is not to say that they do not matter. On the contrary, they do -- and they materialize rather frequently."

Emerging-market companies face $180 billion in redemptions on dollar bonds before 2020 after loading up on debt amid historically low borrowing costs in the past decade. While the International Monetary Fund warned defaults would increase after a slump in commodity prices and currencies over the past two years, Ashmore Group Plc and Aberdeen Asset Management Plc say those concerns are overdone because many emerging-market companies have revenues in dollars.

Hard Line

Just five state-owned companies including Petroleos de Venezuela SA and Russia’s Gazprom PJSC owe a quarter of the $783 billion of debt outstanding from emerging markets, according to S&P. Energy companies were “prolific borrowers” before oil prices plunged 59 percent in the past two years, Kraemer said.

S&P’s concerns, which echo similar warnings from an IMF report published last month, add to an already gloomy picture for sovereign credit ratings. In the first two months of the year, S&P took a hard line on emerging markets, downgrading six nations including Saudi Arabia and Poland. It had negative outlooks for nine out of the 20 largest emerging markets at the end of March, the highest number since mid-2009.

“The pronounced negative bias suggests that the gradual slide of EM sovereign ratings is not only likely to continue, but to gather pace,” according to the report.

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