EM Ratings Trajectory Remains Positive

by Win Thin

Ratings news from EM stands in stark contrast to what we’re seeing in the developed world. Yesterday, Uruguay was upgraded two notches. Today, S&P moved the outlook on Thailand’s BBB+ rating to stable from negative, noting that the fiscal position and real economy have not suffered from heightened political uncertainty. It also cited low debt loads and prudent fiscal policies as major positive factors. Our model puts Thailand as a high BBB+/Baa1/BBB+ credit and so S&P and Moody’s Baa1 are on target. However, Fitch appears to be out of line after it downgraded Thailand to BBB back in April 2009. We too are happily surprised that the political turmoil in Thailand really hasn’t had a significant impact on the underlying fundamentals and is on the cusp of becoming a single A credit. Those strong fundamentals have helped THB be the fifth best EM performer vs. USD so far in Q4. Still, most EM currencies have yet to recover even 38% of the November-December losses, which we think reflects ongoing unease with peripheral euro zone developments as well as a generalized weakening of risk appetite due to China and Korea developments as we head into year-end.

Meanwhile, S&P affirmed its A rating on Korea with a stable outlook. Clearly, the agency felt the affirmation was necessary after recent tensions on the Korean peninsula, noting that “The sovereign credit ratings on the Republic of Korea balance the economic and fiscal strengths of Korea against the related risks of heavy contingent liabilities and potential geopolitical instability.” It added that “Geopolitical risks have increased in the last two to three years due to the uncertainties associated with the DPRK leadership change.” S&P also said that Korea is vulnerable to the banking sector’s “significant” snort-term external borrowing that can be withdrawn on short notice. We note that our own sovereign ratings model puts Korea at A/A2/A vs. actual ratings of A/A1/A+. We agree with S&P’s rating, and note that reducing its short-term external debt by around $50 bln (from about $150 bln in Q3 10) would move Korea’s implied rating to A+/A1/A+. Despite the ongoing tensions with Pyongyang, KRW has basically recouped its North Korea-related losses. However, we feel that further gains are going be tough near-term as the backdrop for EM warrants caution for now.