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European Sovereign Risk Ratings Rebound
November 26, 2015 | IHSEstimated reading time: 3 minutes
In this year’s third quarter, rating downgrades enveloped a broader range of commodity exporters than ever before, but Europe is seeing a ratings rebound, according to a new study from IHS Inc., the leading global source of critical information and insight.
The study, conducted by IHS Global Insight’s sovereign risk team, compares and assesses every sovereign worldwide across ratings agencies and fills in the industry’s long-neglected market space of short-term sovereign credit risk.
“Negative rating actions continued to predominate in Q3, with 43 downgrades and only 26 upgrades,” said Jan Randolph, director of sovereign risk at IHS Global Insight. “Significantly, this negative trend has now extended to other commodity producers, with Latin America and Africa worst affected in Q3-2015 with 14 downgrades in each region.”
Europe’s renewed vigor
Among the 17 upgrades in Europe during Q3 2015 were Ireland, Slovenia, Cyprus, Latvia, Portugal, Bulgaria, Malta and Iceland. The European periphery ratings rebound first began in 2013, led by Ireland, Spain and then Portugal.
“All 17 upgraded countries have shown a renewed vigor of GDP growth, and that has been hugely supportive of the ratings rebound,” Randolph said.
Asia’s rising star: Philippines
While Europe may be the region with the most good news, the Philippines is shining bright in Asia.
“The Philippines has been on a long ratings upgrade trajectory over the last few years,” Randolph said. “The key driver to these upgrades has been successively strong current account surplus generation, with new found sources in export earnings other than workers' remittances and lower energy import bills. However, the latest upgrade in Q3 rests on improved governance standards and reforms enhancing competitiveness under the Aquino administration. A significant improvement in gauges of corruption, transparency, and economic freedom underpinned the improved governance rationale for this outlook upgrade to positive; while the investment grade remained at BBB- or 40/100.”
Latin America’s energy exception: Bolivia
Most significant energy producers in South America (Venezuela, Colombia, Argentina and Brazil) and the Caribbean (Trinidad and Tobago) have experienced some negative rating action over the last 12 months, influenced by energy and commodity prices under pressure since mid-2014.
The sole exception to this negative rating impact from the falling commodities trend has been Bolivia. In relative terms, Bolivia is a more recent energy exporter, whose increased capacity and production is not set to peak until 2019. Many years of hydro-carbon, especially gas-based economic growth and current account surplus generation, has transformed Bolivia's liquidity and solvency metrics for the positive, such that external and domestic debt has been lowered to modest levels.
“Foreign exchange reserves now comfortably exceed public external debt; making the country a 'net creditor nation',” Randolph said. “Bolivia's economy now faces the sharp drop in hydrocarbon prices, but from a position of relative strength.”
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