Emerging Market Corporate Ratings Hindered by Commodities Downturn

Even though global economic growth is set to be the strongest since 2010, the corporate ratings of emerging markets (EM) will take time to catch up. According to a recent report from Fitch Ratings, the downturn in commodities has damaged balance sheets and the Brazilian recession is also a drag on international ratings, despite a likely 10% increase in revenues this year among emerging markets as a whole.

Though Fitch expects that eventually the positive economic atmosphere will shift the direction of its rating actions, it will not likely happen until next year. So far in 2017, EM corporate downgrades have outnumbered upgrades 60 to 45. Ratings outlooks and watches have also tended toward the negative, though less so compared to last year.

Global GDP is expected to increase by 3.1% in 2017 and 3.2% in 2018 from strong growth in the U.S. and robust performance in the eurozone, Fitch said. This will support demand of EM exports. The two years of economic contraction in Brazil, however, weighs on ratings, though a return to growth in that country is anticipated.

Commodity prices, with the exception of oil, have outperformed Fitch Ratings’ expectations. This, along with a weakening U.S. dollar, should contribute to conditions that will lead to expansion for EM corporates. The largest contributors to growth will be energy companies, Chinese domestic homebuilders, utilities, building materials firms and construction firms, Fitch said. Year-end leverage will decline in all regions except China, where a reduction is not expected until 2018.

– Adam Fusco, associate editor

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