Sovereign Rating Monitor: Q4 2018

According to our internal model, the global annual net rating drift* remained positive, but kept easing (+13% in Q4 vs +15% in Q3). The “CEE and Central Asia” (+36%) and the “Middle East & North Africa” (+33%) regions recorded the best dynamics, while the “Euro area & other Western Europe” one (+13%) slowed due to the softer growth momentum.

Highlights:

  • According to our internal model, the global annual net rating drift* remained positive, but kept easing (+13% in Q4 vs +15% in Q3). The “CEE and Central Asia” (+36%) and the “Middle East & North Africa” (+33%) regions recorded the best dynamics, while the “Euro area & other Western Europe” one (+13%) slowed due to the softer growth momentum.
  • Euro area & other Western Europe (p. 9). Over the past three months, positive rating actions continued to prevail. Cyprus regained its Investment Grade status (upgrades by S&P, Fitch and DBRS). Estonia, Latvia and Portugal enjoyed a rating upgrade as well. On the contrary, Italy was downgraded by Moody’s (from Baa2 to Baa3), while Fitch and S&P lowered the outlook to negative due to the escalating tensions between the government and the European Commission on the 2019 budget. The UK still faces high risks due to the Brexit process, but fiscal metrics have continued to improve.
  • CEE & Central Asia (p. 30). The most notable rating actions was the upgrade of Poland to A- by S&P as the strong track record of balanced economic growth and fiscal prudence outweighed the institutional risks. S&P also lifted the outlook on Croatia from stable to positive. We see an upgrade to Investment Grade later in 2019 as increasingly likely.
  • South, Eastern Asia & Oceania (p. 42). Rating actions by agencies remained limited and also the annual net rating drift was stuck at zero. S&P lifted the outlook on Australia back to stable, confirming the AAA rating. With regard to the internal rating, we lowered the outlook on Indonesia from positive to stable due to the rise in the current account deficit.
  • Americas (p. 54). Once again, negative rating actions prevailed over the past three months. S&P downgraded Argentina (from B+ to B), while Fitch lowered the outlook to negative amid the uncertainty over fiscal consolidation and the access to external financing beyond 2019. Fitch also lowered the outlook on Mexico to negative (BBB- rating affirmed), citing the heightened uncertainty over economic policies under the president-elect López Obrador.
  • Middle East & North Africa (p. 64). Morocco and Tunisia faced a downward revision in the outlook. On the contrary, we adopted several positive actions as the rise in oil prices since early 2016 has boosted fiscal and external metrics.
  • Sub-Saharan Africa (p. 71). Fitch revised the outlook on Nigeria from negative to stable and we also lifted our assessment on rebuilding fiscal buffers. We stress the risk of negative rating actions on South Africa due to poor growth.

Download the full publication below

SOVEREIGN RATING MONITOR: Q4 2018

RELATED INSIGHTS

CHINA’S Q4 GDP GROWTH SURPRISED ON THE UPSIDE, BUT RISKS TO THE OUTLOOK HAVE INCREASED
This morning, China published its Q4 GDP growth alongside with December monthly activity data. Q4 growth accelerated to 6.5% yoy which lifted total 2020 GDP to 2.3%. December real activity data were more mixed. While exports came in strongly, important domestic demand components were a bit unsteady.
COVID-19 FACTS & FIGURES
US President-elect Joe Biden has unveiled a $1.9 trillion stimulus package proposal. Following the recent increase in cases, China has imposed new restrictions and lockdowns in the Hebei province. Canada has implemented new restrictions and a provincewide curfew in Quebec that will last until February 8. German Chancellor Angela Merkel warned that the recent rise in Covid-19 cases could force the country to prolong the nationwide lockdown until April.
EQUITIES: STAY POSITIVE WITH A VALUE-CYCLICAL TILT
Following a monster rally in stocks last autumn, multiples are well above historical averages, but equity investors can count on lingering low yields, tighter credit spreads and increasing central banks’ balance sheets which in turn maintain low the cost of equity and the discount rate of future cash flows.