OREANDA-NEWS. December 14, 2015. Credit trends among EMEA corporates will diverge in 2016 as companies in developed markets benefit from gradually improving cash generation and profitability, while their emerging-market (EM) peers contend with higher leverage and weaker cash generation, Fitch Ratings says. These trends support an overall stable outlook for EMEA corporates in the coming year, but a negative outlook for emerging EMEA.

Rising EM risks are driven by slowing growth, low commodity prices, foreign-exchange volatility and country-specific political challenges so that over one-quarter of our emerging EMEA corporate ratings are on Negative Outlook. Highly leveraged companies with dollar-denominated debt or costs and no offsetting dollar revenues are most exposed. Contagion from stalling EM growth is also among the biggest risks for developed EMEA corporates, particularly those exposed to commodity prices.

Weak Chinese demand is a key factor in our negative sector outlook for miners and steel producers as commodity prices are likely to remain under pressure and European steel producers will have to compete with high volumes of Chinese imports. Oil prices are also likely to remain low for longer than previously expected, although cost-deflation should become more pronounced, limiting the impact for major oil companies.

While we expect developed European corporates to see gradually improving profitability and rating headroom, growth will remain weak and overcapacity persists in many sectors. This environment will create little incentive for corporates to increase expansionary capex and we therefore believe M&A will remain the preferred option for boosting growth.

The TMT and pharmaceutical sectors are two that could see a steady flow of deals in the coming year as telecom companies attempt to boost scale and increase their product offerings and drug makers seek to circumvent long research and development lead times through acquisitions.

For more information on our expectations for the corporate sector, including our forecasts for key credit metrics and how our expectations have changed over the last year, see the report "2016 Outlook: EMEA Corporates", available at www.fitchratings.com or by clicking the link above.