FORECASTS

Russia’s 2020 positive outlook

Scope Ratings GmbH published its sovereign risks assessment for the coming year. It appears, investors are more concerned about credit risks facing Italy and Turkey than Scope Ratings, but are relatively optimistic on Greece and Portugal, judging by divergences between credit default swap rates and Scope’s sovereign ratings.

Such divergence in risk assessment is also notable in the case of the United States, where it is the dollar’s unparalleled reserve currency status that masks a deteriorating outlook for the country’s public finances in investors’ risk-free assessments of US government bonds, according to Scope.

Slow global growth, rising non-financial sector debt levels and macro-financial imbalances dominate the outlook for sovereign credit risk in 2020. In a context of the likely limited impact from any further easing of already loose monetary policy from many central banks, governments have varying capacity for launching counter-cyclical fiscal stimulus.

“Macro and geopolitical conditions in 2020 will be challenging for national governments and, by extension, for sovereign ratings,” Giacomo Barisone, head of public finance at Scope, says.

Sovereigns currently rated by Scope with a Negative Outlook are the UK, China, Turkey and Romania. Greece, Portugal, Russia and Lithuania have a Positive Outlook. Of Scope’s universe of 36 rated countries, of which 28 have a Stable Outlook, 33 sovereigns have an investment-grade rating of BBB- or above, with only Greece, Georgia and Turkey assigned non-investment-grade classifications.

“We see some divergence between our sovereign ratings and the market’s perception of risk as proxied via five-year CDS spreads, whilst acknowledging conditions of more general sovereign spread compression in the present ‘risk-on’ market environment,” Barisone says.

At 5-year CDS spreads of 127 bps, investors continue to see Italian risk as somewhat more elevated compared with Scope’s BBB+ sovereign rating on Italy – which is itself 1-2 notches above the assessment of US rating agencies – reflecting Scope’s view of Italy’s systemic importance and associated likelihood of receiving multilateral support in worst-case scenarios.

The market’s view of Portugal and Greece is more optimistic, however, on credit risk in Portugal (BBB) and Greece (BB) at current 5-year spreads of 42 and 127 bps respectively than suggested by Scope’s rating assignments on the two countries. Scope’s ratings are themselves above average assessments from US rating agencies for the two credits, including Positive Outlooks.

“We acknowledge the governments’ long outstanding debt maturities and high shares of debt held by official creditors,” Barisone says.

Turkey’s credit ratings are the lowest in Scope’s rated universe, but market evaluation of Turkish risk at 286 bps appears more bearish.

Scope rates the US at only AA, 1-2 notches below the view of the US credit rating agencies, highlighting the country’s structurally weak public finance outlook even as US treasuries remain the global risk-free asset.

Scope’s sovereign ratings capture risks stemming from government borrowing requirements in 2020. In the EU, Italy is the only country with gross government financing needs of above 20% of GDP next year, a threshold above which the IMF deems countries to have ‘limited’ fiscal space. Belgium, Spain and Hungary have gross financing needs of between 15% and 20% of GDP in 2020 among the EU’s current 28 member states.

Outside the EU, three governments stand out as needing to meet significant funding needs: Japan, the US and China. However, these countries will benefit from sustained low financing rates, which support market access and ability to roll over debt. Of rated countries with more meaningful gross financing needs, only China displays a 10-year borrowing rate of above 2% while countries with higher market financing rates like Turkey and Georgia face more moderate funding needs in 2020.

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