New York – 11 June 2015 - Fitch Homef785e24c-3184...Sovereign Rating Trends & Outlooks: Rating...

New York – 11 June 2015

Sovereign Update: Divergent Trends More Pronounced

Charles Seville, Senior DirectorSovereign Group

2www.fitchratings.com

Growth Outlook & Ratings Trends

Developed Markets: US & Eurozone

Emerging Markets: Winners and Losers

Agenda

6/6/13


Sovereign Rating Trends & Outlooks:Rating Convergence Has Stalled

Negative Outlooks Outnumber Positive Fewer DM Downgrades and EM Upgrades

2007 2008 2009 2010 2011 2012 2013 2014 2015

DM EM-Asia EM-EuropeEM-Latam EM-MEA

Average Rating by Region

Ratings as of 15 May 2015

Negative Outlook Positive Outlook

AA+

AA

AA-

A+

A

A-

BBB+

BBB

BBB-

BB+

BB

BB-

B+

AA+

AA

AA-

A+

A

A-

BBB+

BBB

BBB-

BB+

BB

BB-

B+

Latin America

Emerging Europe

Emerging Asia

Middle East/Africa

Developed Markets

Cyprus B-

Iceland BBB

New Zealand AA

Portugal BB+

Cote d’Ivoire B

Bolivia BB-

Jamaica B-

Malaysia A-

Mongolia B+

Russia BBB-

Costa Rica BB+

El Salvador BB-

Brazil BBB

Angola BB-

Ghana B

Lebanon B

Nigeria BB-

South Africa BBB

Belgium AA

Finland AAA

Hungary BB+


2013 2014 2015f 2016f

Worlda 2.5 2.5 2.5 2.7

US 2.2 2.4 2.3 2.5

Eurozone -0.5 0.9 1.5 1.7

Germany 0.2 1.6 1.8 2.0

France 0.7 0.2 1.3 1.5

Italy -1.7 -0.4 0.8 1.0

Spain -1.2 1.4 2.8 2.4

UK 1.7 2.8 2.5 2.3

Japan 1.6 -0.1 1.3 1.5

Brazil 2.5 0.2 -1.0 1.2

China 7.6 7.4 6.8 6.5

India 6.9 7.2 7.8 8.1

Russia 1.3 0.6 -3.0 -1.0

Economic Outlook 2015:Eurozone Starts Pulling Its Weight, US Forecast Cut

Growth Improving, But Not Uniformly GDP Growth Forecasts

a 2011 GDP weights at market exchange rates Source: Fitch Peer Analysis Tool

-4

-2

0

2

4

6

8

10

2000

2002

2004

2006

2008

2010

2012

2014

2016

(%)

Worldª

Major Advanced

Emerging Markets

Real GDP Growth


Fed’s Call on Rate Rises is ‘Data-Dependent’

Fed’s Triggers For Rate Rises

Growth

• Economy forecast to grow above-trend �

Labour Market

• Sustained job creation, full employment ��

Inflation

• PCE measure of inflation nearing 2% �

Fitch view

• Growth will recover. Fed will raise

rates in September 2015, follow gradual path

Growth Falters on Weak Consumption, Trade

Source: Federal Reserve, Fitch

-4.0

-3.0

-2.0

-1.0

0.0

1.0

2.0

3.0

4.0

5.0

6.0

201

0Q

42

01

1Q

12

01

1Q

2

201

1Q

32

01

1Q

42

01

2Q

1

201

2Q

2

201

2Q

3

201

2Q

4

201

3Q

1

201

3Q

2

201

3Q

3

201

3Q

4

201

4Q

1

201

4Q

22

01

4Q

3

201

4Q

4

201

5Q

1

(%)Consumption InvestmentStocks Net tradeGovernment GDP

Contributions to Real GDP Growth

Source: BEA, Fitch

Economic Outlook 2015:US Growth Will Recover, And Fed Will Start To Raise Rates


US Public FinancesImprovement Will Be Short-Lived On Current Policies

US Government Debt to Increase post-2018…

90

95

100

105

110

115

120

201

3

201

4

201

5

201

6

201

7

201

8

201

9

202

0

202

1

202

2

202

3

202

4

(% of GDP)

interest rate shock (+250bps)

baseline

US General Government Debt/GDP

Deficit Falling, On Buoyant Taxes, Low Rates

Source: Fitch

-1600

-1400

-1200

-1000

-800

-600

-400

-200

0

200

400

200

4

200

5

200

6

200

7

200

8

200

9

201

0

201

1

201

2

201

3

201

4

201

5

(USDbn) Deficit Interest payments

12-month Federal Government Deficit


2014 2015 2016

1.6 1.8 2.0

0.2 1.3 1.5

-0.4 0.8 1.0

1.4 2.8 2.4

2.8 2.5 2.3

Economic Outlook 2015:A Closer Look at Europe

Unemployment (%)Inflation (%)Real GDP (%)

Source: Fitch Peer Analysis Tool

2014 2015 2016

0.8 0.1 1.6

0.7 0.0 1.0

0.2 -0.4 1.0

-0.2 -1.0 1.0

1.5 0.3 1.3

2014 2015 2016

5.0 4.8 4.6

10.2 10.2 9.8

12.8 13.0 12.5

24.3 22.5 21.0

6.3 5.6 5.5


US and Eurozone – Different Positions in Credit Cycle

All Sectors Increasing Debt in US…

-3

-2

-1

0

1

2

3

4

5

2004 2006 2008 2010 2012 2014

(USDtrn)

Household CorporateFinancial GovernmentTotal

US Debt Increase by Sector*

…but Only the Government in the Eurozone

-1.0

-0.5

0.0

0.5

1.0

1.5

2.0

2.5

3.0

2004 2006 2008 2010 2012 2014

(EURtrn)Household CorporateBanks GovernmentTotal

Eurozone Debt Increase by Sector*

* Change in gross debt outstanding, year on yearSource: Datastream


Eurozone Private Sector Deleveraging Not Complete

Europe’s Deleveraging Options

Four Approaches Historically

• Credit growth lags GDP growth, or

nominal stock of debt declines

• Finland 1990s, Malaysia/Korea after 1998

• Nominal GDP growth reduces debt/GDP,

usually means a weak central bank

• Spain/Italy late 1970s, Chile late 1980s

• Clear path to debt reduction, can include

public and private sector

• US 1930s, Argentina 2000s, Mexico 1980s

• Often after an oil boom or war

• US early 1940s, Nigeria early 2000s,

Egypt late 1970s

France and Italy Turning Positive

-10

-5

0

5

10

15

20

25

2007

2008

2009

2010

2011

2012

2013

2014

2015

(%) Germany France Italy Spain

Growth Rate of Bank Lending

Source McKinsey, Datastream

Austerity

High Inflation

Real GDP Growth

Widespread Default

Most common

Least common


0

1

2

3

4

5

Sp

ain

Irela

nd

Slo

venia

Be

nchm

ark

Fra

nce

Ge

rmany

Au

str

ia

Fin

land

Real Interest Rate on Government Debt

2.7%

(%)

-2

-1

0

1

2

3

4

Fra

nce

Sp

ain

Ne

therla

nds

Be

lgiu

m

Cyp

rus

Gre

ece

Po

rtugal

Be

nchm

ark

Primary Balance

3.9%(% of GDP)

-1

0

1

2

3

4

Cyp

rus

Gre

ece

Au

str

ia

Fra

nce

Po

rtugal

Slo

venia

Slo

vakia

Be

nchm

ark

Real GDP Growth

3.3%

(%)

2015 Values Versus Averages in Past Developed Market Fiscal Adjustment Episodes

Real growth too lowReal rates still high in the periphery Primary balance too low

Eurozone Debt Dynamics in Historical Context

Source: Fitch


Eurozone Bond Markets Versus Ratings

The Bond Market Has Come Back,

Ratings Have Not

0

2

4

6

8

10

12

14

2006

2007

2008

2009

2010

2011

2012

2013

2014

2015

(%)Spread 10yr Periphery vs BundsPeriphery SCI (RHS)

Spreads & Sovereign Ratings*

BBBB+BBB-BBBBBB+A-AA+AA-AAAA+

Looking Forward, Debt Stabilises –

As Have Ratings

0

10

20

30

40

50

60

70

2006

2007

2008

2009

2010

2011

2012

2013

2014

2015

2016

(%)"Spread" Debt/GDP to GermanyPeriphery SCI (RHS)

Government Debt & Sovereign Ratings*

BBBB+BBB-BBBBBB+A-AA+AA-AAAA+

* Sovereign Credit Index: average Foreign Currency Ratings for Greece, Ireland, Italy, Portugal and Spain; spreads are unweighted averagesSource: Fitch and Datastream

“Whatever it takes”


Eurozone Issues In Focus

Political Agenda

Portugal / Legislature / September

• Ruled by centre-right coalition (Social

Democrats and CDS)

• Leading polls: opposition Socialist Party

Spain / Legislature / by 20 December

• Ruled by centre-right People’s Party (PP)

• Leading polls: PP, but centre-left & centre-

right challenged by new leftist Podemos

UK / EU Referendum / by 2017

• Surprise Conservative majority puts Brexit

firmly back on the agenda

• Conciliatory noises from European

capitals, but “renegotiation” may not get far

Greece / Legislature / January

• Won by anti-austerity radical left SYRIZA

• Next steps (1) program extension (2) new

funding must be arranged (3) debt relief?

Policy Agenda

Italy / Political and economic reform

• PM Renzi has an ambitious agenda but faces

a diverse coalition and strong vested interests

• Changes to electoral laws, senate and judicial

reform

• Jobs Act allows for easier dismissal of

workers, which should help increase

permanent employment

France / Economic reform

• PM Valls and President Hollande face political

opposition to reform, including from within the

gov’t

• “Macron Law”: reforms in transport, employee

savings plans and more liberalised retail hours

ECB

• Additional easing to expand the balance sheet

• Open question on whether QE will address

disinflation


Greece – 2015 Pressure Points

Post-Election Political Challenges

2015 Changes All Negative

Downgrade to ‘CCC’

• Poor progress in negotiations

• Deposit withdrawals accelerated

• ECB took a hard line on gov’t funding

What Next?

• Reaching a crunch in June

• ELA at EUR80bn mid-May

• Banking crisis without ELA funding

• Capital controls?

• A “Greek EUR” – closer to own currency

• Regional implications of default unpredictable

• Contagion lower risk than 2012…

• …but adverse market/depositor reaction possible

Approaching the Wall

0.0

0.5

1.0

1.5

2.0

2.5

3.0

3.5

4.0

Apr May Jun Jul Aug Sep Oct Nov Dec

(EURbn) IMF Bonds

2015 IMF and Bond Redemptions

Source: Datastream, Fitch


Emerging Markets:Weaker Growth Reveals Structural Shortcomings

India One of the Few Bright Spots

Real GDP Growth Forecasts

Average

2010-13 2014 2015 2016

Brazil 3.4 0.0 -1.0 1.2

Russia 3.4 0.6 -3.0 -1.0

India 6.2 7.4 7.8 8.1

China 8.8 7.4 6.8 6.5

Turkey 6.0 2.8 3.2 3.8

South Africa 2.7 1.5 2.1 2.3

Indonesia 6.2 5.1 5.5 6.0

Mexico 3.5 2.1 3.0 3.5

Source: Fitch

In most large EMs, growth is forecast to be lower in 2015-16 versus 2010-13

Structural Reforms are Dated

• Early 1990s: Trade reforms

• 1994: Real Plan

• Late 1990s: Privatisation

• 2000: Fiscal Responsibility

Law

• 1970s-1980s: Agric. &

land reforms

• 1990s: Privatisation/

SOE reform

• 2001: WTO entry

• 1991: Trade liberalisation,

exchange rate reform

• 2003: Fiscal

responsibility law

• Early-mid-1990s:

transition to market

economy/privatisation

• 2000: tax and regulatory

reform; health & pension

Brazil

India Russia

China

Future Reforms

• Infrastructure development • More open economies• Regulatory reform• Improvements in the business climate


-50

0

50

100

150

200

250

300

25 45 65 85 105 125 145

Fiscal Breakeven Oil Price (USD/bbl)

Fiscal and External Positions 2014

Sovere

ign N

et F

ore

ign A

ssets

(%

GD

P)

Emerging Markets:Lower Oil Prices Puts Pressure on Some

Source: Fitch

Few Oil Exporters are Comfortable With Prices Below USD75/bbl

Kuwait

Norway

Abu Dhabi

Kazakhstan

Saudi Arabia

Congo (Rep.)

Russia

Azerbaijan

Angola

Gabon

Nigeria

Venezuela

Bahrain

Ecuador

Best Positioned

Worst Positioned

In the Middle


Russia Rating Considerations

Structural Weaknesses Add to External Stresses

Rating Considerations

• Evident structural economic weaknesses –

governance and business environment

• Possibility of additional sanctions, and deeper

economic contraction

• High commodity dependence, but rouble

adjustment helps external finances adjust to

lower oil prices

• Banking system stress from RUB depreciation

and policy rate hikes, requiring sovereign

support, including National Wealth Fund

• Banks and corporates have no access to

international capital markets

• FX reserves and external liquidity deterioration

Russian Weakness Prior to the Ukraine Crisis

-20

-15

-10

-5

0

5

10

15

2006 2008 2010 2012 2014

(%) C I G X-M GDP

Real GDP Growth Contributions

Source: Datastream

Investment falling before Ukraine crisis


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New York – 11 June 2015 - Fitch Homef785e24c-3184...Sovereign Rating Trends & Outlooks: Rating...

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Transcript of New York – 11 June 2015 - Fitch Homef785e24c-3184...Sovereign Rating Trends & Outlooks: Rating...