Worldwide, sovereign risk downgrades outpaced upgrades by a ratio of more than three-to-one in the second quarter of 2016. Sovereign risk downgrades outnumbered downgrades by 61 to 19, according to IHS Markit, an information and analytics firm that compared sovereign nations across rating agencies.
Commodity-related downgrades reached record levels, said Jan Randolph, director of sovereign risk at IHS Global Insight. “[They] increased, especially in Africa and the Middle East. In addition, the risk associated with the Brexit vote drove ratings downgrades for the United Kingdom.”
The Middle East, Saudi Arabia, the United Arab Emirates, Qatar, Kuwait, Bahrain and Oman all suffered ratings downgrades and, for the first time for many of these nations, will begin to issue domestic public debt to aid the financing of their deepening fiscal deficits, Randolph said.
Commodities pressures in the form of lower prices for oil and gas also played a part in the downgrade of Mozambique, Nigeria and Angola.
In the U.K., setting aside the uncertainty created by Brexit, “the United Kingdom faces specific credit risk in its regular dependence on foreign investment inflows to finance its record current-account deficit,” Randolph said.
For Brazil and Argentina, South America’s two largest economies and highly dependent on commodity exports, the picture is more mixed, he said. Brazil has lost its investment-grade status due in part to a welter of political and economic upheaval caused by corruption and political scandals. Meanwhile, Argentina’s effort to repair relations with the international financial community and to re-open international capital markets has prompted IHS Markit to lift the Argentine credit risk rating.
- Nicholas Stern, editorial associate