Emerging markets face pain as Fitch warns of rating cuts

Emerging markets face more rating downgrades than upgrades this year as foreign debt levels leave them vulnerable to potentially rising US interest rates and the strength of the dollar, according to Fitch Ratings.

Latin America, the Middle East and Africa will be impacted more by lower credit scores because of the high share of their foreign-currency debt, said James McCormack, Hong Kong-based global head of sovereign and supranational group at Fitch.

Emerging Europe will probably have more positive ratings as the area benefits from growth in Germany, while Asia will see stable ratings, he said.

“The countries that have borrowed in dollars are the countries that are most exposed,” McCormack said in an interview in Singapore. “We’re already seeing that US interest rates are moving higher, the dollar has been strengthening.”

Fitch’s ratings as of December 31, 2018 Region Negative Outlooks Positive Outlooks Emerging Asia None None Emerging Europe Turkey (BB) Armenia (B+) Croatia (BB+)Georgia (BB-) Hungary (BBB-)Macedonia (BB)Russia (BBB-) LatinAmerica Argentina (B) Aruba (BBB-) Costa Rica (BB)*Mexico (BBB+)Nicaragua (B-)Uruguay (BBB-) Jamaica (B) Middle East & Africa Lebanon (B-) Lesotho (B+) Tunisia (B+)Zambia (B-) Egypt (B)
*NOTE: Costa Rica was lowered to B+ on January 15, 2019

The depreciation in emerging-market currencies last year alone raises the burden on governments who borrowed in foreign currencies, McCormack said.

Argentina, whose peso was the worst-performing emerging-market currency last year, has 83% of its government debt in foreign currency, according to Fitch. Turkey, whose lira fell more than 28% last year, has 47% of the total in non local debt.

Among the lower-rated sovereigns with negative outlooks, a measure of bond risk as per five-year credit-default swaps has risen almost 400 basis points in the past year to 628 for Argentina as of January 25, according to CMA. The increase was 345 to 778 for Lebanon.

Below are some of Fitch’s views on the global economy for 2019 and emerging markets:

The dollar will be strong in 2019 not only because of Fed rate increases but also because the US economy will grow faster than Europe and Japan China and the US won’t have an immediate resolution of the trade dispute by March, but there will be ongoing dialog and continued incremental measures from Chinese authorities to address the slowdown in growth.

The presidential election will be critical in determining the policy path in Argentina. Turkey’s current-account and trade deficits are more or less resolved but, the growth outlook is weak. Fitch will be watching the policy response to the weaker growth outlook and whether the relative strength of public finances can be maintained.

Forming the government is probably the first step for Lebanon in addressing issues related to high government debt. It has been able to rely on support from other countries in previous episodes and will likely be able to do that “to some degree”.

© 2019 Bloomberg L.P