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14.11.2008 Business & Finance

Fitch downgrades four emerging markets

By The Statesman

Fears about the outlook for emerging markets were heightened on Monday when four countries saw their credit ratings downgraded because of the threat of global recession and the drying up of capital flows.

The downgrades of Bulgaria, Hungary, Kazakhstan and Romania illustrated the continuing dangers facing these economies, Fitch Ratings warned.

The agency also revised to negative from stable the long-term foreign currency ratings of South Korea, Mexico, Russia and South Africa because of fears over the "profound deterioration' in the global outlook and the continuing difficulties in raising money in the capital markets.

Chile and Malaysia had their ratings revised down from positive to stable.

David Riley, head of Fitch's global sovereign ratings group, said: 'The profound deterioration in the global economic and financial outlook poses significant threats to the emerging markets.

The developed economies are heading for the biggest slowdown in 25 years and this will have a big impact on trade with emerging markets.

'Capital and financial flows to the emerging markets are going to be restricted and more expensive, with those countries with high current account deficits and large external funding needs most exposed.'

Emerging markets have seen some signs of recovery since moves by the International Monetary Fund, World Bank, European Central Bank and the US Federal Reserve to help shore up these economies.

The IMF, World Bank and ECB jointly offered Hungary €25bn in loans. Ukraine and Iceland are also being helped by the IMF, while the Fed offered four so-called strategic economies - Brazil, Mexico, Singapore and South Korea - $30bn each in swap lines to boost liquidity in their markets.

Since October 27, the main benchmark of emerging market equities, the MSCI index, has risen more than 100 points to around 560, although it peaked above 1,000 in July.

Bond yield spreads between emerging market countries and US Treasuries have narrowed sharply since then. The Embi+ index has fallen to around 600 basis points over US government paper from 904bp on October 24.

The MSCI was buoyed on Monday by China"s $586bn fiscal stimulus package, although weaker emerging market currencies, such as the Romanian leu, the Hungarian forint and the South Korean won, fell against the dollar following the Fitch report.

Fitch stressed that the eastern European economies were most exposed to the current crisis because of large current account deficits and external financing needs.

Bulgaria and Ukraine have current account deficits of around 25 per cent, while the Baltic economies of Latvia and Lithuania have deficits around 15 per cent.

Romania was the biggest casualty as its credit rating was cut two notches to junk status.

This could have serious implications for its economy as many investors, such as pension funds, are only allowed to buy investment grade securities.

The country was downgraded to BB plus with negative outlook from BBB. Bulgaria and Kazakhstan were downgraded one notch to BBB minus while Hungary was downgraded one notch to BBB. FT