Global Deflation Alert: Emerging Market Credit Downgrades Are Soaring

By Ye Xie at Bloomberg

Investors be warned. There have been more credit-rating downgrades in developing nations in the first nine months of this year than in the whole of 2014 and the outlook keeps getting gloomier, according to Standard & Poor’s.

An economic slowdown and lower commodity prices are to blame, said Diane Vazza, head of S&P’s Global Fixed Income Research Group, in a report Wednesday. S&P cut the ratings for 88 bonds sold by developing countries and companies in the third quarter, including Brazil, Zambia and Ecuador, while raising the grades for 22 securities. That brings the total number of downgrades to 224 this year, compared with the 206 cuts in 2014.

The ratings cuts will continue to overwhelm emerging markets in the coming months. As of Sept. 30, about 28 percent of companies in developing nations have a negative outlook or are on the watch list for potential downgrades, compared with 24 percent in the second quarter, the report showed.

S&P is not alone in sounding the alarm. UBS Group AG’s Bhanu Baweja, the strategist who correctly called this year’s rout in developing nations, is also concerned. The one-month long rebound in emerging-market currencies and stocks is poised to reverse, hesaid.

Brazil’s Downgrade

Latin America dominated the downgrades in the quarter after S&P stripped Brazil’s investment-grade rating last month.

The number of defaults in emerging markets this year increased to 17, the highest since 2012, after five more companies failed to make goods on debt payments in the third quarter, including Indonesian mining company PT Berau Coal Energy Tbk and Brazilian sugar producer Tonon Bioenergia S.A.

Emerging-market stocks fell to a two-week low and currencies weakened on Wednesday after the Federal Reserve said the U.S. economy continues to expand at a “moderate” pace, bolstering speculation that policy makers may increase benchmark borrowing costs this year.

Source: Emerging-Market Credit Downgrades Soar to Overtake 2014 Tally - Bloomberg

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