Fitch Downgrades Emerging Markets as Global Slowdown Spreads

By Russell Ward

Nov. 10 (Bloomberg) -- Fitch Ratings cut its debt ratings for four Eastern European countries and downgraded the outlook for Russia, South Korea and Mexico as the global slowdown spreads to emerging economies.

Bulgaria, Hungary, Kazakhstan and Romania had their sovereign ratings cut as part of a review of 17 emerging-market economies, Fitch said in a statement today. The outlooks for Chile, Malaysia and South Africa were also lowered.

The U.S., Japan and the euro zone will all shrink next year, the International Monetary Fund said last week, weakening demand for goods exported from developing nations. The global financial crisis is also making it more difficult for emerging economies to attract foreign capital, putting a strain on their currencies and finances and prompting countries including Hungary and Pakistan to ask the IMF for loans.

``The profound shift in the global economic and financial outlook pose significant real economy and policy challenges for emerging markets,'' David Riley, London-based head of global sovereign ratings at Fitch, said in a statement. ``The risks of economic and financial stress that could undermine sovereign creditworthiness have risen.''

Emerging Europe is the ``most vulnerable'' to worsening global financial and economic conditions because of its high debt and current-account deficits, Fitch said.

Hungary's Recession

Hungary's long-term, foreign-currency rating was cut one level to BBB, the second-lowest investment grade, in light of ``the severity of the recession'' and ``foreign-currency mismatches in the private sector,'' Fitch said. Still, it added that the country's $20 billion in IMF-led support ``largely removed external financing and liquidity risks.''

Bulgaria's one-level cut to BBB-, the lowest investment grade, reflects ``the increasing risk of a recession in response to a marked decline in external financing flows,'' Fitch said.

Russia's outlook was revised to ``negative'' because ``room for policy maneuver is constrained by the risk of deposit and capital flight, the systemic weakness of the banking system and relatively high inflation.'' The country still maintains an ``exceptionally strong balance sheet,'' Fitch said.

South Korea's outlook was also cut to ``negative,'' on concern the country's foreign-exchange reserves may decline as the nation faces the biggest crisis since it needed an IMF bailout in 1997.

Malaysia's outlook worsened to ``stable'' from ``positive,'' reflecting the drop in commodity prices and weakening demand for the nation's electronics exports, Fitch said. Mexico's was cut to ``negative'' because of a U.S. recession, reduced capital flows and lower oil prices.

Fitch affirmed the ratings of Brazil, China, India, Peru, Poland, Taiwan and Thailand.

To contact the reporter on this story: Russell Ward in Tokyo at rward16@bloomberg.net