Emerging Market Government Credit ‘Markedly’ Worse, S&P Says

By Kim Kyoungwha

April 21 (Bloomberg) -- Emerging-market governments’ credit quality “markedly” deteriorated in the past six months and policy responses will be key to avoid ratings downgrades, Standard & Poor’s Ratings Services said.

The agency lowered 10 of 43 sovereign ratings among such debt issuers, including one default, and another 10 had their outlooks cut to negative in the six months ended March 31, S&P said in a report yesterday in New York. Eighteen emerging markets are on negative outlook and none have positive outlooks, according to the statement.

“That said, we think that the credit fundamentals of this asset class remain broadly intact,” said John B. Chambers, chairman of the Sovereign Ratings Committee. “For those sovereigns with negative outlooks, policy responses will be key, with any lowering of ratings likely to be modest in scope, as has been the case historically.”

Emerging-market currencies including South Korea’s won, the Russian ruble and Brazil’s real weakened in the past year, increasing the cost of servicing overseas debt, as fallout from the global credit crunch rippled through their export-dependent economies. Governments worldwide lowered borrowing costs at an unprecedented pace, increased public spending and reduced taxes to shore up growth in their economies.

China, Brazil, Chile, Czech Republic, Peru, Poland, Slovak Republic, and Tunisia -- which are investment-grade sovereigns with a stable outlook -- should weather the current global recession, the ratings agency said.

Those ratings are backed by policy makers’ efforts in building up international reserves, reducing government debt burdens, improving economic competitiveness, keeping inflation low and bolstering the solvency of financial systems, S&P said.

The extra yield investors demand to own developing-nation debt instead of U.S. Treasuries was 5.69 percentage points yesterday, according to JPMorgan Chase & Co.’s EMBI+ Index. The spread averaged 6.70 points in the past six months and peaked in 2008 at 8.65 points on Oct. 24.

To contact the reporters on this story: Kim Kyoungwha in Beijing at kkim19@bloomberg.net.