Emerging market downgrades likely to gather pace says S&P
By Marc Jones LONDON, May 4 (Reuters) - Emerging market sovereign downgrades are likely to gather pace Standard and Poor's warned on Wednesday, having already hit the fastest rate this year since the height of the financial crisis. Nine of the top 20 emerging market economies have negative outlooks on their S&P ratings and a new report from the firm said 'contingent liabilities' -- costs of bailing out state-owned firms or damaged banks in a crisis -- could add to the strains. "We currently do not anticipate a Government Related Entity (GRE) debt crisis comparable to Dubai World in 2009; however, the rapid surge in GRE debt and EM credit growth more broadly poses new potential risks to EM sovereign ratings," S&P said. Emerging market economies accounted for almost half of the growth in global debt between 2007-2014 and nearly half of that in terms of gross issuance came from government-related firms. At the end of last year some 170 GREs had $783 billion worth of outstanding bonds with a quarter of that concentrated in just five firms; Mexico's Pemex, Brazil's Petrobras, PDVSA in Venezuela, Gazprom in Russia and Korea's Export-Import Bank. "Contingent liabilities crystalizing on a government's balance sheet have so far not played an important role in the negative ratings trajectory of EM sovereigns. This is not to say that they do not matter," S&P said. "On the contrary, they do -- and they materialize rather frequently. In fact, a new IMF contingent liabilities database covering 80 countries has identified 91 episodes of financial sector crises between 1990 and 2014, leading to a call on public funds to, on average, of 9.7 percent of GDP." Despite the concentration of debt in the big Latin American and Russian state-controlled oil firms, by far the largest proportion of GRE debt was in China where it adds up to almost 120 percent of the country's annual economic output. Brazil is next at just over 20 percent, S&P calculated, followed by Mexico and Russia which each have about 20 percent. The report said contingent liability issues rarely lead to downgrades on their own. However, they often trigger or stack on top of other economic problems and can be tricky to estimate because governments may not implicitly promise support. "Contingent liabilities will then weigh on already-stressed public finances, a slowing economy, and sagging confidence." Therefore with so many countries already on downgrade warnings, the run of ratings cuts was likely to keep going. "This pronounced negative bias (in rating outlooks) suggests that the gradual slide of EM sovereign ratings is not only likely to continue, but to gather pace," S&P said. The largest state-owned firms by country (source S&P) Sovereign Name Sector FC Rating SACP Uplift Debt (% of GDP) GG Debt (2016)* Likelihood of Extraordinary government support Mexico Pemex Oil & Gas BBB+ bb 4 7.0 45.0 Almost Certain Mexico Comision Federal de Electricidad Energy BBB+ bb- 5 4.0 45.0 Almost Certain Russia Gazprom Oil & Gas BB+ bbb -2 3.4 14.6 Extremely High Russia Rosneft Oil & Gas BB+ bb 1 4.4 14.6 Very High Russia VTB Bank Financial BB+ bb- 2 3.9 14.6 Very High Russia Vnesheconombank Development Bank BB+ b- 5 1.7 14.6 Almost Certain Russia Russian Railways Transport BB+ bb+ 0 1.2 14.6 Extremely High Russia Gazprombank Financial BB+ bb- 2 1.0 14.6 High Russia Transneft Infrastructure BB+ bbb -2 1.0 14.6 Extremely High Malaysia Petronas Oil & Gas A- aa -4 5.0 49.8 Almost Certain Malaysia 1MDB Investment Fund NR NR 3.0 49.8 N/A South Africa Eskom Energy BB+ ccc+ 6 7.2 48.8 Extremely High South Africa SANRAL (Road Agency) Infrastructure NR NR 0.8 48.8 N/A South Africa South African Airways Transport NR NR 0.3 48.8 N/A South Africa Transnet Infrastructure BBB- bbb+ -2 1.7 48.8 Extremely High South Africa DBSA Development Bank BBB- bb- 3 1.0 48.8 Almost Certain Venezuela PDVSA Oil & Gas CCC 9.3 46.8 Moderately High Brazil Petrobras Oil & Gas B+ b- 2 9.7 74.5 Very High Brazil Electrobras Energy BB bb- 1 0.7 74.5 Almost Certain Brazil BNDES Development Bank BB bbb+ -4 12.9 74.5 Almost Certain Brazil Itaipu Energy BB bb+ -1 0.9 74.5 Extremely High ---- Mexico All GREs 20.0 45.0 44.4 Russia All GREs 20.4 14.6 139.7 Malaysia All GREs 10.8 49.8 21.7 South Africa All GREs 11.0 48.8 22.5 Brazil All GREs 24.1 74.5 32.4 China All GREs 117.0 46.9 249.5 (Editing by Robin Pomeroy)
