=DJ Emerging Mkts Need More Progress On Fiscal Accounts-Fitch
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By Matthew Cowley
Of DOW JONES NEWSWIRES
NEW YORK (Dow Jones)--Having reduced many of their external vulnerabilities, emerging market economies must now prepare for higher global interest rates by improving their fiscal accounts, according to credit ratings agency Fitch Ratings.
Fitch upgraded five emerging market economies in 2005, and raised the outlook on a further three countries, thanks largely to improvements in external solvency, including strong current account surpluses and a reduction of overseas debt, said Roger Scher, managing director at Fitch Ratings.
But, "not enough has been done on public finances," he told Fitch's "Hotspots" conference in New York.
The improvement in credit quality has largely been reflected in the significant tightening of risk premiums on emerging market government debt, Scher said. On Thursday, JPMorgan's Emerging Markets Bond Index Plus closed at a record-tight level of 215 basis points over U.S. Treasurys.
However, many emerging markets have "persistent" central government deficits, and this poor fiscal performance could hinder them if global interest rates move higher, as expected, Scher said.
While Fitch sees the global economy making a "soft landing," the likely reduction of global liquidity will expose poor fiscal performers, Scher said. Among the emerging market regions, Latin America is the most vulnerable to this phenomenon, followed by Eastern Europe, the Middle East and Africa, and the Asia Pacific region.
Indeed, Latin America lags the other emerging market regions on a number of key indicators, with low economic growth and high public debt ratios, he said.
Scher also warned that the recent rise of foreign investment in local public debt markets could be a double-edged sword. While it reduces external vulnerabilities by removing exchange rate risk for the issuing countries, any sharp exit by foreign investors could also damage the nascent local markets and may not be easily replaced, he said.
For example, Turkey recently introduced a withholding tax on investments in the local fixed income market, which, according to Fitch senior director Nick Eisinger, may be an attempt to slow non-resident participation in the local debt market. Foreign buying carries "benefits but also risks," he said.
Turkey looks set for a "constructive" year in 2006, albeit with slower progress than in recent years, Eisinger said. Contrary to most emerging markets, concerns about Turkey lie primarily on the external side, while the country is putting in healthy growth rates supported by investment and improving public finances, he said.
While Turkey would be "hit quite badly" by a sharp rise in global interest rates, the country is "well placed" to weather "the more predictable unwinding" of global liquidity expected by Fitch, he said.
Russia's rating has made the fastest advance in Fitch's ranks, helped by one of the fastest declines in general government debt, all thanks to the windfall from sky-high oil prices.
But according to Fitch director Sharon Raj, the country now stands at a cross-roads: further increases in the government's stabilization fund, which currently stand at $50 billion, could help raise the rating, but political risk, slowing reforms and a weak corporate sector could lead to a "creeping erosion of creditworthiness," Raj said.
Russia's "war chest" stands in marked contrast to Venezuela, another major oil-producing nation, but which is far more vulnerable to any drop in international crude oil prices, said Fitch senior director Morgan Harting. Fitch expects an average price for Brent crude of $56 per barrel in 2006, and Venezuela would be "very sensitive" to any drop in this forecast, given its high dependence on oil revenues, he said.
Latin America's two power houses, Brazil and Mexico, epitomize much of the macroeconomic progress made in recent years. Brazil has benefited from a strong growth in exports and improving external solvency indicators, but its general government debt burden, at 75% of gross domestic product, keeps it lower on the ratings scale compared to investment-grade Mexico, which has reduced its overseas debt levels.
Mexico was recently upgraded by Fitch, to BBB, despite elections this April and the uncertainties they may entail. According to Fitch senior director Shelly Shetty, the country has far more stable institutions, which limits the possibility of reversing the progress that has been made on the economy - and indeed encourages the incumbent to keep them in place.
"There are incentives...that prevent the president from undermining macroeconomic improvements," she said.
Argentina, meanwhile, must settle its differences with so-called "holdout" creditors that did not participate in last year's massive debt restructuring, according to Harting. That would allow the country to remove its default rating on the bond' that weren't tendered in last year's debt restructuring, opening up more room for the country to tap international markets, he said.
"Argentina has low requirements (for funding), but even so, there are concerns," Harting said. The government "doesn't want to crowd out incipient bank lending" in the local market, and so access to international capital may be crucial, he said.
Harting said he expects Argentina to make a proposal for the holdouts soon, probably on terms that are less attractive than the original offer settled in June, he said. |
