Low energy and commodity prices and a global economy stuck in low gear have provoked a surge in sovereign ratings downgrades in the first three months of this year. And rating agencies anticipate another wave of downgrades if a wider global economic slowdown materializes.
“The first quarter of 2016 marked a clear relapse in the balance of global rating downgrades and upgrades, with downgrades three times the number of upgrades,” says Jan Randolph, director of sovereign risk at IHS Global Insight in London. “Overall, 49 countries received downgrades [compared] to 16 upgrades.”
Energy-exporting countries downgraded in the first quarter included: Angola, Azerbaijan, Bahrain, Republic of Congo, Gabon, Kazakhstan, Nigeria, Oman and Saudi Arabia.
Moody’s Investors Service says that despite the volatility in financial markets in the first quarter, it doesn’t currently expect advanced economies to fall into recession. Standard & Poor’s predicted in January that sovereign downgrades were likely to accelerate this year, after negative rating outlooks were more than triple the level of positive outlooks in 2015.
The balance between positive and negative outlooks worsened in all regions except the Asia-Pacific last year, S&P says. The biggest deterioration was in the Middle East, the Commonwealth of Independent States, and Africa.
There are some bright spots among sovereign ratings, according to IHS. Several countries in Southeastern Europe have been upgraded recently, including Albania, Serbia, Bosnia-Herzegovina and Romania. Both Albania and Serbia have new governments with a zeal for reforms to comply with EU membership requirements, IHS says. In addition, Ireland and Iceland have both shown remarkable economic turnarounds, it says.
However, sovereign downgrades in emerging markets have hit the fastest pace this year since the global financial crisis, S&P says, noting that contingent liabilities from government-related entities could weigh on already stressed public finances. With so many countries already on downgrade warnings, the spate of rating cuts is likely to gather pace, S&P warns.