Downgrades for Several Commodity Based Economies

Dear PGM Capital Blog readers,

On Wednesday, February 17, 2016, rating agency Standard & Poor’s downgraded, the credit ratings of Saudi Arabia, Brazil, Kazakhstan, Bahrain and Oman.

The downgrade of Saudi Arabia credit rating by rating agency S&P, of Wednesday February 17, was the country’s second downgrade in four months:

  • On Wednesday, February 17, 2016, S&P cut Saudi Arabia’s debt with two notches, to ‘A-/A-2’ from ‘A+/A-1.’
  • On October 30, 2015, S&P cut Saudi Arabia’s rating to ‘A+/A-1’ from ‘AA-/A-1+.’

S&P notes that Saudi Arabia is currently prepared for a deficit of 13% in 2016, but the firm believes the kingdom’s budget assumptions are based on oil trading at US$45 a barrel.

S&P is set to publish another opinion on Saudi Arabia on April 8, 2016.

On Wednesday, February 17, credit rating agency S&P cut Brazil’s sovereign credit rating deeper into junk territory, by cutting it, from BB+ to BB with a negative outlook, just five months after becoming the first agency to strip the country of its coveted investment grade.

Standard & Poor’s highlighted the government’s inability to plug the widening fiscal deficit amid a deepening political and economic crisis. Brazil’s economy, the largest in Latin America, is on track for its worst recession since records began in 1901, after contracting around 4 percent last year.

Brazil’s budget deficit has mushroomed since Rousseff took office in 2011. The deficit equaled 10.3 percent of gross domestic product in 2015, nearly five times its shortfall in the 12 months to mid-2011.

On Wednesday February 17, credit rating agency S&P cut Kazakhstan debt rating one notch to BBB- from BBB but left on a negative outlook due to concerns about inflation, exchange rate pressures and banking sector stability.

Like Saudi Arabia and Brazil, Bahrain saw its credit rating cut on February 17, with two notches, from BBB- to BB, for which reason it also lost investment grade status.

S&P lowered Oman’s credit rating on, February 17,  as well with two notches to BBB- stable from BBB+ and maintains the negative outlook.

The downgrade of Oman’s credit rating by rating agency S&P, of Wednesday February 17, was the country’s second downgrade in three months.

On November 21, 2015, S&P lowered Oman’s sovereign debt in a sign of growing pressure on the finances of some Gulf Arab oil exporters, from A- to BBB+ with negative Outlook.

In several of our presentations we have mentioned, that for several reasons a country can not build a sustainable economy based on revenues from commodities.

If commodity prices stays lows for sometimes we expect more credit rating downgrade for commodities based economies or even default.

In our region we have seen the downgrade of Venezuela credit rating to CCC with negative outlook, in January of last year. As we can see in below video, Financial Times even is predicting that the South American Oil Rich Country and founder of OPEC might default on its debt this year.

Also in our area we have seen the downgrade of Trinidad & Tobago’s Credit rating by Moody’s in April 30th of last year to Baa2 from Baa1, with negative outlook. It is worth mentioning that Moody’s Baa2 rating is equivalent with a BBB rating of S&P.

Following the downgrade of the credit rating of Trinidad & Tobago, on May 1st of last year, Moody’s also downgraded the rating for Petroleum Company of Trinidad & Tobago (“Petrotrin”) to Ba1 with negative outlook. With the downgrade of Moody’s to Ba1 which is equivalent with a S&P BB+ it means that, the Trinidad Petroleum Company (Petrotin) has lost its investment grade status.

When writing this article, the news hit the wire that on Thursday, February 25th, credit agency Fitch downgraded, the credit rating of Suriname from BB- to B+ with a negative outlook.

The other side of the story is that Economies of commodities based countries like Norway, Canada, Sweden, Australia, Australia and Lichtenstein, which have diversified their economy, are booming, and all of them have maintained the prestigious AAA credit rating with stable outlook.

It is also worth-mentioning that Invesco Ltd, the manager of about US$741 billion of assets, is buying large miners’ bonds as the industry cuts costs and shareholder payouts to withstand a slump in commodity prices.

On February 26, the fund manager said that it will increase holdings of debt from companies such as Glencore Plc, Rio Tinto and BHP Billiton Ltd. These miners have shored up balance sheets by scrapping or selling projects, halting dividends and buying back debt after a collapse in prices for copper, iron ore and other raw materials.

As can been from below chart, the moves have helped stop a rout in the industry’s bonds, following a 14 percent loss last year.

In our region, we can see also that Chile and Uruguay have been upgraded from respectively A+ and BBB- to respectively AA- and BBB with stable outlook.

We believe that in the near future, if the macro-economic picture and subsequently the demand for commodities doesn’t change, we’ll see more downgrades of mono commodity based economies.

Until next week.

Yours sincerely,

Suriname Times foto

Eric Panneflek

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