Fitch: Countries Take Six Years to Regain Investment Grade Status
OREANDA-NEWS. Based on rating histories since 1995, a country whose sovereign rating is downgraded to speculative grade (SG) from investment grade (IG) takes an average of 6.1 years to regain its IG status, with most countries making the transition back up, says Fitch Ratings in a new report.
Upgrades outnumber downgrades, with 27 upgrades of 25 sovereigns to IG and 18 downgrades of 17 sovereigns to SG. Romania, Uruguay and Croatia have all crossed the IG threshold more than once. Ten of the 18 downgrades to SG were eventually reversed, including all downgrades prior to 2011 with the exception of Egypt (B/Stable).
No sovereigns have crossed the IG threshold since 2013, when we upgraded both the Philippines and Uruguay to 'BBB-'/Stable (March) and downgraded Croatia to 'BB+'/Stable (September).
Sovereigns upgraded to IG tend to be growing quickly and have declining government debt levels that are lower than the 'BB' and 'BBB' medians. Sovereigns downgraded to SG tend to have no growth and government debt expanding by about three percentage points of GDP per year at the time of the downgrade. Median current account positions of sovereigns upgraded to IG and downgraded to SG are not notably different - both run deficits of about 1% of GDP - but the median for net external debt as a share of GDP is falling in those upgraded and rising quickly in those downgraded.
Recently, the ratings of several sovereigns have either moved closer to the threshold, or come into investors' focus as potentially doing so in the months ahead. As of October 2015, Brazil (BBB-), Russia (BBB-) and South Africa (BBB) were on Negative Outlook, and Hungary (BB+) and Portugal (BB+) were on Positive Outlook.
Rating Outlook durations for sovereigns crossing the IG threshold are nearly identical to averages for the entire rating scale, where sovereigns upgraded to IG are on Positive Outlook prior to the upgrade for an average of 12.6 months. Conversely, those downgraded to SG are on Negative Outlook prior to the downgrade for an average of 7.3 months
Between 1995 and 2014, our one-year rating transition rates show downgrades (and rating withdrawals) from 'BBB' to lower rating categories affected, on average, 4.9% of sovereigns - marginally lower than the rating categories above and below 'BBB' at 5.4% and 6.0% respectively. This may be consistent with corrective policy adjustments being undertaken with greater urgency and conviction by sovereigns faced with a downgrade to SG, thus preserving their IG status. One-year transition upgrades from 'BB' averaged 8.9% - higher than both 'B' (8.5%) and 'BBB' (5.6%) categories.
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