|Argentina Could Be in Line for a Rating Upgrade|
|Roubini Econoteam model and our Latin America team have suggested for some time that Argentina’s sovereign rating could be upgraded, with our analysts noting that the “holdouts” saga with its creditors obscured the economy’s decent fundamentals.
President Mauricio Macri’s market-friendly approach is boosting Argentina’s credibility and creditworthiness. After four months in power, the administration has been successful in solving two of the most pressing issues: Removing FX controls and settling the legal battle with the country’s creditors. These steps have already won upgrades from Moody’s and S&P, and we see more to come in the next 12 months in light of a more stable policy mix and a stronger institutional framework.
Beyond the resolution of the debt issue, the key catalysts for further upgrades will include progress on the two most pressing macroeconomic priorities: Anchoring inflation and starting the fiscal adjustment. Economic activity will continue to contract (led by a fall in consumption) and inflation will accelerate in H1 (due to FX weakening), but we expect H2 to be better on both fronts, leading to a strong rebound in 2017. However, there are risks around the implementation of necessary but unpopular measures to shore up Argentina’s fiscal position.
The markets do not seem to price in further upgrades, but we see more space for foreign currency-denominated bonds to rally, given Argentina’s relatively strong fundamentals on a regional basis.
..We Also Believe Hungary Could Receive a Rating Upgrade
We have long believed that Hungary’s current credit ratings do not reflect its strong fundamentals. In recent years, Hungary has been one of the biggest improvers in our model as its fiscal balance has improved and deleveraging has continued. Debt dynamics, too, have significantly improved over the past few years, with public debt declining to 75% of GDP in 2015 from 80% in 2010 and external debt falling to 130% of GDP in 2015 from 160% in 2010.
Meanwhile, improved policy stability and the ongoing deleveraging in the household sector have reduced Hungary’s external vulnerabilities, and the banking sector has become resilient on the back of its reduced reliance on cross-border borrowing and an improved overall loan-to-deposit ratio.
Moreover, despite the deterioration of its political institutions, GDP growth is relatively high. We expect the economy to grow by 2.2% this year on the back of the cyclical rebound in the eurozone and a combination of European Central Bank and local monetary easing.
Potential Downgrades: Debt Burdens and Commodity Exposure Dominate
The discrepancy between China’s Shadow Credit Rating (BBB+) and the average of the three main rating agencies (AA-) suggests a downgrade in the next 12 months. If, as we expect, China seeks to maintain the fast pace of credit growth with which it started the year, the rating agencies will probably take action as a result of increased financial risks. The recent bout of credit stimulus has helped reduce the external liabilities of state-owned enterprises and corporates, but the increase in overall leverage suggests credit growth will continue to sharply outpace nominal GDP, risking more unproductive investment.
Saudi Arabia is struggling as the low oil prices take a toll on economic growth via tightened fiscal policy, which has weakened domestic demand and drained the economy’s external buffers (although the latter remain strong). Fitch recently cut Saudi Arabia’s sovereign rating to AA- from AA and we expect other rating agencies to follow suit in the next 12 months. Triggers for this would include any changes in oil forecasts, delays in implementing privatization or new tax policies.
Our model and our qualitative analysis indicate South Africa may become the next emerging market after Brazil to lose its full investment-grade rating after S&P revised the outlook on its BBB- rating to negative in early December. This has been partially priced into the markets, as government bond yields (USD) are already in line with those countries in “junk” territory, such as Brazil; however, we would still expect another sell-off from institutional investors if it happens. Catalysts for a downgrade could include further (excessive) intervention in economic policy from the President and/or greater pre-election spending.