With early-2010 data providing conflicting indications over the sustainability of the global recovery, Fitch Ratings believes the largest emerging market (EM) economies are demonstrating a greater resilience than their developed market peers, underlining the prospect of a two-speed return to trend growth levels.
In turn, this is leading to a relatively faster rate of recovery in the credit quality of non-financial corporate issuers domiciled in the major emerging markets.
However, given the challenges still facing the global economy, the agency cautions that the recovery momentum being generated by the leading EMs could be curtailed by a number of variables – including stubbornly high US unemployment levels; an absence of recovery in the US housing market; increased protectionism impacting global trade; and potential policy mis-steps by leading economies' central banks and governments, as they seek to time their exit from stimulus-induced loose fiscal and monetary policies.
Any or all of these factors could still produce a "double-dip" recession scenario, which would have a substantial negative impact on corporates in EM economies – and particularly those that are more exposed to, and dependent on, global export markets.
The principal credit themes impacting EM corporates in the first two months of the year were the initiation of tightening measures by the Chinese authorities to try to rein in price inflation in various asset markets, and the continuing deterioration of credit quality among certain Indonesian high-yield issuers.
China's tightening measures have included increasing bank capital reserve requirements, raising interest rates, and implementing directives to the banks regarding their lending practices.
Some specific measures have also been directed at the housing market, reflecting concerns about the development of a potential bubble in certain regional markets. While Fitch shares these concerns, and recognises the need for the Chinese authorities to manage pro-actively the pricing dynamics of the market, the agency's outlook on the sector is for a generally stable environment in 2010 – leading to reasonable financial performance by the rated issuers in its universe.
With Asia's large EM economies – China and India – expected to continue leading the global economic recovery with projected GDP growth rates of 8.8 per cent and seven per cent, respectively, for 2010, Fitch expects that corporates in these countries will continue to pursue targeted growth strategies.
These would likely involve increasing levels of outward cross-border M&A activity designed to enhance access to commodity raw materials and energy security, as well as expanding geographical diversification and vertical integration. Fitch expects that some Indian corporates will opt to use debt to finance acquisitions, potentially exerting some stress on credit metrics, whereas Chinese state-owned companies are more likely to utilise the government's huge foreign exchange reserves as an acquisition currency.
In Latin America (LatAm), Fitch is seeing an improvement in market sentiment, as well as a return to a more "normal" business environment. Liquidity risk, in particular, has declined as the availability of financing recovered strongly in the second half of last year.
Since the middle of 2009, several non-bank corporates with ratings that range from 'B' to 'BBB' have successfully tapped the debt capital markets. Total cross-border issuance volume by non-financial corporates during this time period was $36.1bn. This compares with about $5.6bn during the first half of 2009, and less than $5bn during all of 2008.
As a result of these capital market conditions, plus above-average support provided by relationship banks and government development banks, capital structures can generally be described as above average. Debt amortisation schedules appear manageable for most rated companies in the region.
Commodity prices play a key role in credit risk, and are also expected to have a significant impact on GDP growth.
Leading the growth will be Brazil, with a projected GDP growth rate of 5.3 per cent in 2010. Mexico is projected to grow by three per cent during 2010, after falling sharply during 2009.
The outlook for the Latin American commodity producers, specifically metals and mining, is stable in 2010. The companies in this region have been better able to weather the global downturn than their international peers, despite significant falls in operating profit during 2009.
Demand should improve in the region for many commodities – owing to government stimulus programmes, which have increased construction activity, industrial production, and infrastructure projects.
China also continues to be a key market for these companies, and its demand for commodities such as iron ore and copper is anticipated to be strong in 2010.
Assuming limited M&A activity, rating actions should be minimal during 2010, and leverage should begin to return to pre-credit crisis levels.
Corporate credit quality improves
Corporate credit quality in global emerging markets has continued to improve in the first two months of 2010, with upgrades outnumbering downgrades by two to one. This contrasts with an almost exactly inverse relationship for H2 2009, when downgrades outnumbered upgrades by the same ratio – and reflects the overall improvement in EM corporate credit quality as recessionary conditions eased through the second half of 2009.
With the exception of some idiosyncratic downgrades in Asia in January – principally affecting distressed Indonesian high-yield issuers – downgrade intensity across Fitch's corporate EM universe is down significantly relative to H2 2009, with an average of only 2.5 downgrades in January/February 2010 versus an average of 8.7 per month during Q4 2009. Highlighting the recent trend of increasing convergence between corporate and sovereign debt, a high proportion of outlook revisions in January reflected sovereign rating actions (principally Russia and Indonesia. The trend of outlook/rating watch revisions in January and February reinforced the overall positive picture for credit direction, with only three negative revisions compared with 17 positive revisions, the large majority of which were seen in CEE with the stabilisation of previously negative outlooks on Russian corporates in line with that of sovereign.