New York 11 June 2015

Transcription

1 New York 11 June 215

2 Sovereign Update: Divergent Trends More Pronounced Charles Seville, Senior Director Sovereign Group

3 Agenda Growth Outlook & Ratings Trends Developed Markets: US & Eurozone Emerging Markets: Winners and Losers 6/6/13 2

4 Sovereign Rating Trends & Outlooks: Rating Convergence Has Stalled Negative Outlooks Outnumber Positive Fewer DM Downgrades and EM Upgrades Developed Markets Emerging Asia Negative Outlook Belgium AA Finland AAA Malaysia A- Mongolia B+ Positive Outlook Cyprus B- Iceland BBB New Zealand AA Portugal BB+ Average Rating by Region DM EM-Asia EM-Europe EM-Latam EM-MEA AA+ AA AA- A+ AA+ AA AA- A+ Emerging Europe Russia BBB- Hungary BB+ A A- A A- Latin America Middle East/Africa Costa Rica BB+ El Salvador BB- Brazil BBB Angola BB- Ghana B Lebanon B Nigeria BB- South Africa BBB Bolivia BB- Jamaica B- Cote d Ivoire B BBB+ BBB BB+ BB BBB- BB- BBB+ BBB BB+ BB BBB- BB- B+ B Ratings as of 15 May 215 3

5 Economic Outlook 215: Eurozone Starts Pulling Its Weight, US Forecast Cut Growth Improving, But Not Uniformly Real GDP Growth (%) a 211 GDP weights at market exchange rates Source: Fitch Peer Analysis Tool Worldª Major Advanced Emerging Markets GDP Growth Forecasts f 216f World a US Eurozone Germany France Italy Spain UK Japan Brazil China India Russia

6 Economic Outlook 215: US Growth Will Recover, And Fed Will Start To Raise Rates Fed s Call on Rate Rises is Data-Dependent Fed s Triggers For Rate Rises Growth Economy forecast to grow above-trend Labour Market Sustained job creation, full employment Inflation PCE measure of inflation nearing 2% Fitch view Growth will recover. Fed will raise rates in September 215, follow gradual path Source: Federal Reserve, Fitch Growth Falters on Weak Consumption, Trade Contributions to Real GDP Growth (%) Consumption Stocks Government Investment Net trade GDP 21Q4 211Q1 211Q2 211Q3 211Q4 212Q1 212Q2 212Q3 212Q4 213Q1 213Q2 213Q3 213Q4 214Q1 214Q2 214Q3 214Q4 215Q1 Source: BEA, Fitch 5

7 US Public Finances Improvement Will Be Short-Lived On Current Policies Deficit Falling, On Buoyant Taxes, Low Rates 12-month Federal Government Deficit (USDbn) Deficit Interest payments US Government Debt to Increase post-218 US General Government Debt/GDP (% of GDP) interest rate shock (+25bps) baseline Source: Fitch 6

8 Economic Outlook 215: A Closer Look at Europe Real GDP (%) Inflation (%) Unemployment (%) Source: Fitch Peer Analysis Tool 7

9 US and Eurozone Different Positions in Credit Cycle All Sectors Increasing Debt in US US Debt Increase by Sector* Household Corporate (USDtrn) Financial Government Total but Only the Government in the Eurozone Eurozone Debt Increase by Sector* Household Corporate (EURtrn) Banks Government Total * Change in gross debt outstanding, year on year Source: Datastream 8

10 Eurozone Private Sector Deleveraging Not Complete Europe s Deleveraging Options France and Italy Turning Positive Most common Austerity High Inflation Widespread Default Four Approaches Historically Credit growth lags GDP growth, or nominal stock of debt declines Finland 199s, Malaysia/Korea after 1998 Nominal GDP growth reduces debt/gdp, usually means a weak central bank Spain/Italy late 197s, Chile late 198s Clear path to debt reduction, can include public and private sector US 193s, Argentina 2s, Mexico 198s Growth Rate of Bank Lending (%) Germany France Italy Spain Real GDP Growth Often after an oil boom or war US early 194s, Nigeria early 2s, Egypt late 197s Least common Source McKinsey, Datastream 9

11 Eurozone Debt Dynamics in Historical Context 215 Values Versus Averages in Past Developed Market Fiscal Adjustment Episodes Real Interest Rate on Government Debt (%) % 3 2 Primary Balance (% of GDP) % Real GDP Growth (%) % Spain Ireland Slovenia Benchmark France Germany Austria Finland France Spain Netherlands Belgium Cyprus Greece Portugal Benchmark Real rates still high in the periphery Primary balance too low Source: Fitch -1 Cyprus Greece Austria France Portugal Slovenia Slovakia Benchmark Real growth too low 1

12 Eurozone Bond Markets Versus Ratings The Bond Market Has Come Back, Ratings Have Not Spreads & Sovereign Ratings* (%) Spread 1yr Periphery vs Bunds Periphery SCI (RHS) Whatever it takes BB BB+ BBB- BBB BBB+ A- A A+ AA- AA AA+ Looking Forward, Debt Stabilises As Have Ratings Government Debt & Sovereign Ratings* (%) "Spread" Debt/GDP to Germany Periphery SCI (RHS) BB BB+ BBB- BBB BBB+ A- A A+ AA- AA AA * Sovereign Credit Index: average Foreign Currency Ratings for Greece, Ireland, Italy, Portugal and Spain; spreads are unweighted averages Source: Fitch and Datastream 11

13 Eurozone Issues In Focus Political Agenda Portugal / Legislature / September Ruled by centre-right coalition (Social Democrats and CDS) Leading polls: opposition Socialist Party Spain / Legislature / by 2 December Ruled by centre-right People s Party (PP) Leading polls: PP, but centre-left & centreright challenged by new leftist Podemos UK / EU Referendum / by 217 Surprise Conservative majority puts Brexit firmly back on the agenda Conciliatory noises from European capitals, but renegotiation may not get far Greece / Legislature / January Won by anti-austerity radical left SYRIZA Next steps (1) program extension (2) new funding must be arranged (3) debt relief? Policy Agenda Italy / Political and economic reform PM Renzi has an ambitious agenda but faces a diverse coalition and strong vested interests Changes to electoral laws, senate and judicial reform Jobs Act allows for easier dismissal of workers, which should help increase permanent employment France / Economic reform PM Valls and President Hollande face political opposition to reform, including from within the gov t Macron Law : reforms in transport, employee savings plans and more liberalised retail hours ECB Additional easing to expand the balance sheet Open question on whether QE will address disinflation 12

14 Greece 215 Pressure Points Post-Election Political Challenges 215 Changes All Negative Downgrade to CCC Poor progress in negotiations Deposit withdrawals accelerated ECB took a hard line on gov t funding What Next? Reaching a crunch in June ELA at EUR8bn mid-may Banking crisis without ELA funding Capital controls? A Greek EUR closer to own currency Regional implications of default unpredictable Contagion lower risk than 212 but adverse market/depositor reaction possible Approaching the Wall 215 IMF and Bond Redemptions (EURbn) IMF Bonds Apr May Jun Jul Aug Sep Oct Nov Dec Source: Datastream, Fitch 13

15 Emerging Markets: Weaker Growth Reveals Structural Shortcomings India One of the Few Bright Spots Structural Reforms are Dated Brazil China Real GDP Growth Forecasts Average Brazil Russia India China Turkey South Africa Indonesia Mexico Source: Fitch In most large EMs, growth is forecast to be lower in versus Early 199s: Trade reforms 1994: Real Plan Late 199s: Privatisation 2: Fiscal Responsibility Law India 1991: Trade liberalisation, exchange rate reform 23: Fiscal responsibility law Future Reforms Infrastructure development More open economies Regulatory reform Improvements in the business climate 197s-198s: Agric. & land reforms 199s: Privatisation/ SOE reform 21: WTO entry Russia Early-mid-199s: transition to market economy/privatisation 2: tax and regulatory reform; health & pension 14

16 Emerging Markets: Lower Oil Prices Puts Pressure on Some Few Oil Exporters are Comfortable With Prices Below USD75/bbl Fiscal and External Positions 214 Sovereign Net Foreign Assets (% GDP) Norway Kuwait Abu Dhabi Best Positioned Kazakhstan Congo (Rep.) Saudi Arabia Gabon In the Middle Azerbaijan Angola Russia Nigeria Venezuela Worst Positioned Bahrain Ecuador Fiscal Breakeven Oil Price (USD/bbl) Source: Fitch 15

17 Russia Rating Considerations Structural Weaknesses Add to External Stresses Rating Considerations Evident structural economic weaknesses governance and business environment Possibility of additional sanctions, and deeper economic contraction High commodity dependence, but rouble adjustment helps external finances adjust to lower oil prices Banking system stress from RUB depreciation and policy rate hikes, requiring sovereign support, including National Wealth Fund Banks and corporates have no access to international capital markets FX reserves and external liquidity deterioration Source: Datastream Russian Weakness Prior to the Ukraine Crisis Real GDP Growth Contributions (%) C I G X-M GDP Investment falling before Ukraine crisis

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