Global Sovereign Ratings Rise Despite Worries About European Economies

• The trend in global rating actions swung sharply net positive last quarter in a ratio of more than 5:1, mainly because of improving outlooks for emerging economies notably in Asia and Eastern Europe. Downgrades in the quarter were concentrated on southern Europe, with both Greece's and Portugal's ratings lowered further as their public finances worsened amid growing financial turmoil. In the fourth quarter of 2009, rating actions held a slightly positive bias at just over 1:1, following a wave of downgrades in the southern Eurozone and some Caribbean economies (Jamaica and Barbados).
  
  
• The move toward positive global ratings emerged in the third quarter of 2009, led by emerging markets and reflecting the multi-speed economic recovery around the world and the disproportionate damage the financial-sector-induced credit crunch and global recession have had on banking systems and public-sector finances in the West.
  
  
• Many economies in Asia and Latin America remained resilient during the 2009 credit crunch and recession, and emerged with stronger cyclical and structural growth prospects, attracting a new wave of global portfolio capital since March 2009.
  
  
• Indonesia's rating remains on the ascent, attracting further upgrades in the first quarter of 2010. As one of the few countries to deliver strong growth in 2009 based on robust domestic demand, improving debt metrics, reduced external financing vulnerabilities, and more general macroeconomic and political stability, the country has been placed on the cusp of investment grade by many ratings agencies.
  
  
• There is growing evidence that public finances are stabilizing in Eastern Europe, in a trend that started in the Baltics, led by Estonia, and has spread to southeastern Europe. Although these turnarounds are far from complete and start from substantially weakened levels of solvency and liquidity, the situation in Eastern Europe is no longer in general deterioration, but in slow repair.
  
  
• Oman, Saudi Arabia, Morocco, and Lebanon all received notch upgrades in the first quarter of 2010. Firmer oil prices and global demand over the last 12 months have supported the fiscal and foreign asset positions of the two oil exporters (Saudi Arabia and Oman), while enduring reform and macroeconomic stability commitments in Morocco have allowed the country to be raised into the lowest investment-grade notch.
  
  
• In the West, attention was focused on Greece, which was downgraded by Standard & Poor's in April from investment grade to junk status because of the country's poor financial position and weak prospects for rehabilitation. Portugal was a target for both notch and outlook downgrades in the first quarter of 2010 on perceived credit deterioration and a weakened fiscal and solvency position. Both countries, as Eurozone members, will be unable to regain competitiveness to enable a growth recovery from currency devaluation or lowering interest rates. Instead, they will have to focus on deflation and structural reforms as in Ireland, but with less open and flexible economies and lower levels of human capital and foreign direct investment to allow for economic adjustment and leverage a recovery.