More upgrades seen for emerging markets but risk abounds, says S&P

By Reshmi Basu

New York, Nov. 10 - More emerging market credits are listed with a positive bias to their ratings than a negative one but risk still remains, according to a new report from Standard & Poor's titled "Emerging Market Credit Quality Remains Cheery, but Risk Looms."

As of Sept. 30, only 10% of rated issuers in the emerging markets had a negative outlook or ratings on CreditWatch negative, which is a 4% drop from the end of June. The positive bias was 14%, a little lower than the 16% at June's end.

"The positive bias in emerging markets is being sustained by robust domestic growth, which is being stoked by high commodity prices in many emerging markets and, in turn, helping the upward momentum in ratings," according to author Diane Vazza, managing director.

But the report warns that the slowdown in China may impact commodity-exporting countries. And continued rising interest rates in the United States could threaten the pace of fund inflows.

Emerging market credit quality has steadily improved for several quarters, with upgrades outpacing downgrades for five consecutive quarters.

In the third quarter, 41 upgrades and eight downgrades were recorded.

Brazil accounted for 67% of all Latin American upgrades and 44% of the global emerging market total.

Rating activity was the heaviest among sovereigns with nine upgrades and six downgrades, followed by banks, which recorded eight upgrades and zero downgrades.

Of the nine sovereign upgrades, four each occurred in the Eastern Europe/Middle East/Africa region and Latin America and there was one in the Asia/Pacific region.

Within the non-financial sector, the third quarter saw 24 upgrades with the metals, mining and steel sector leading the way with six upgrades. The utility sector scored five upgrades and telecommunications had four. The only downgrade was in utilities.

The Eastern Europe/Middle East/Africa and the Asia-Pacific region show the most the most promise for upgrades, S&P said. Countries that could benefit from potential upgrades include Russia, Kazakhstan and Romania.

By sector, banks and telecommunications appear best positioned for net upgrades. And issuers in the utilities and capital goods sector appear to be the most vulnerable to net potential downgrades.

© 2015 Prospect News.
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