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Emerging Markets Update


Ratings revision on Oil price, commodities

Ratings downgrades for sub-sovereign companies were expected following the downgrade of the Kazakhstan sovereign rating.

• We believe opening up of an interbank market may support local bonds in the mediumterm as foreign investors increase their holdings while concerns regarding credit risk abate.

Rio Tinto downgrade will not affect our view on the company. It is one of the best plays in M&M sector in the challenging operating environment offering low credit risk and potential benefit from metal prices rebound.

• The affirmation of Petronas ratings was expected and is generally positive, however, we prefer alternatives in the commodity sector offering better returns.

• The new legislation in the Brazilian oil industry, if approved, could be positive for Petrobras and could increase the government’s revenue.

• Mexico’s 2015 GDP increased in line with market expectations. We don’t expect any substantial market reaction to the report.

Petrobras rating downgrade by Moody’s was offset by the announcement of the possible shift in Brazilian oil industry regulations. Petrobras’ ability to service its debt is one of the main concerns for the country’s capital market

Brazil credit rating was downgraded by Moody’s to Ba2 (Neg) from Baa3 (Neg). It was partly expected by the market, as the economic situation in Brazil continues to deteriorate due to the current political tension and the government’s inability to implement fiscal reforms. The Brazilian crisis has mainly an internal origin, and the situation could turn around very quickly.


Russian output and demand

• Introduction of a new budget rule by the Ministry of Finance is neutral for bonds : According to media, the Ministry of Finance considers introduction of a new budget rule under which the government will be buying foreign currency in the market if oil price exceeds USD40-50 per barrel. It is supposed to help in reducing ruble volatility with no implications for inflation. The rule is currently under discussion and may be implemented after 2018

Russia’s output indicators continue to shrink.

 Private consumption is weak despite the low base.

 We expect 2016 GDP to shrink by 2.1% y/y if the Brent average posts USD31/bl.

 We expect the economy to expand by 0.5% y/y in 2016 on Brent at USD59/bl.

Danske Bank on its assessment of the Russian economy says January 2016 output and demand data show that the deepening economic contraction has been left behind, while the development of macro indicators has become L-shaped and a recovery would need a much higher oil price

In their view , a change in sentiment as a result of a revocation of sanctions would be supportive.

  • The fall in industrial production continued (-2.7% y/y versus -4.5% y/y a month earlier)
  • The demand side remains weak on account of the purchasing power crash and low consumer confidence despite slowing inflation (9.8% y/y in January 2016 versus 15.0% y/y in January 2015)
  • Real wages shrank by 6.1%, which was less than expected but is still weighing on retail sales, which saw a softer fall due to the base effect.

According to Danske  base-case scenario, we expect Russia’s economy to shrink by 2.1% y/y in 2016 on the assumption the Brent average price stays at USD31/bl as crude futures were pricing in mid-January 2016 (USD36.7/bl as of 19 February). We expect 2016 GDP to expand if the crude average crosses USD53/bl. We see downside risks to our base-case scenario forecasts if the crude average falls under USD30/bl and the central bank delays policy rate cuts.



In 2015, the Mexican GDP rose 2.5 YoY, in line with market expectations.

The country’s insulation from the oil price slump is partly a result of a 2015 full year hedge for all export oil sales at a high price.

Tax increase in other industries additionally supports the government’s balance that upholds investors confidence.

The Mexican government shows its ability to effectively react to the external shocks. At the same time, the situation may get worse if Pemex fails to improve its efficiency. We don’t expect any substantial market reactions to the announcement


Moody’s downgraded Petrobras to B3 (Neg) from Ba3 (Neg).

It is based on the company’s high debt, eroding liquidity, negative FCF and further BRL devaluation risk.

Petrobras’s B3 rating reflects a change in Moody’s assumption that the company would likely be supported by the government. According to Moody’s, the current fiscal situation in Brazil could prevent the government from supporting Petrobras sufficiently to avoid default.

The agency pointed at the importance of the assets sale for the company

The negative outlook reflects Moody’s expectations on further deterioration of the company’s financial indicators in the next 12-18 months.

Due to Petrobras’s high importance for the Brazilian economy, its inability to service its debt may trigger another strong blow for the country’s capital market.

According to our estimates, the company’s E&P division all in costs are in USD 53-60 per bbl range. In current terms the company is strongly unprofitable. Risky investors may try to earn on Petrobras’ debt with maturities in 2016


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