Fitch sees tough year ahead for sovereign ratings

Fitch has made 15 downgrades already this year, and is on track for a record number.

A currency trader walks by the screens showing the foreign exchange rates at the foreign exchange dealing room in Seoul, South Korea, on Wednesday, July 6, 2016. Lee Jin-man / AP Photo

In a gauge of the global economic unease, the ratings agency Fitch said that sovereign credit ratings are on track for a record number of downgrades this year.

And Brexit is making it worse.

In its latest biannual Sovereign Review and Outlook, the UK agency said that there were 15 downgrades in the first six months of this year compared with the previous annual high of 20 in all of 2011.

Overall, Fitch has 22 ratings on a negative outlook, suggesting this year’s final total is highly likely to exceed the 2011 high-water mark.

The agency said the significance of the Brexit vote “is difficult to overstate”. In the short term, it said, the vote has led to a downgrade of the UK’s credit rating and a lowering of growth forecasts for the country.

The wider concern, Fitch said, is that “developments in the UK make it more probable that populist or Eurosceptic movements find greater support elsewhere in the EU, providing added impetus for political fragmentation and polarisation trends that became evident in the aftermath of the euro-zone crisis”.

It pointed to a referendum in Italy in October on constitutional reform as another possible flashpoint that “could trigger political instability”.

For the Middle East and Africa, Fitch said 10 sovereign ratings are on negative outlook this year. The four in the Middle East on negative outlook are Saudi Arabia, Lebanon, Iraq and Tunisia.

Sovereign credit ratings weigh the risks and rewards of investing in a given country. While most directly meaningful to bond investors, they provide a useful indication of the prospects for a country’s economy.

“The primary impact on the region of lower sovereign ratings is probably most evident in terms of borrowing costs,” said James McCormack, Fitch Ratings’ managing director.

He said ratings can affect broader investor sentiment as well when the Middle East is looking for greater foreign direct investment. “Current account balances are weaker because of lower commodity prices and capital account flows may be affected by changes in investor appetite, so the overall balance of payments positions are at risk of less favourable out-turns.”

This comes as the UAE and wider Gulf had their growth forecasts cut last month amid the fall of oil prices since 2014.

The World Bank cut its growth forecast for the UAE by 1.1 percentage points to 2 per cent this year amid low oil prices and budgetary spending cutbacks.

The revision comes after an estimated 3.4 per cent growth last year for the UAE.

The global lending institution said that while oil-dependent Arabian Gulf countries had made moves to raise cash to make up for the budgetary shortfalls, such efforts would not completely plug the gap.

“Gulf economies are much better prepared for credit rating cuts than other energy producers such as Venezuela,” said Jason Tuvey, a Middle East economist at Capital Economics in London. He said Saudi Arabia has already suffered a sharp drop in economic growth where the economy is struggling and it would be lucky to record any growth this year.

“There aren’t many bright spots in the global economy at present. The US is one such ray of light where the Fed has only resisted an interest rate rise because of the global economy. This means investors turn to gold and US Treasuries as safe havens.”

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