OREANDA-NEWS. In its latest global Credit Outlook report, Fitch Ratings says that rating outlooks are improving in most sectors in developed market regions but worsening in emerging markets (EM), where they have fallen for the last five years and are now more negative than for their developed market equivalents in core sectors. History shows a correlation between a strengthening US dollar and weakening EM sovereign credit worthiness as falling US dollar incomes can affect credit fundamentals.

Fitch's sector outlooks, which capture the operating environment and the underlying fundamental trend of asset prices, have a more negative bias than our rating outlooks for 2016. In total 27% of sectors have a negative outlook, up from 14% at the start of 2015. Sectors under pressure include energy and commodities, retail, and banking systems in many EM countries as well as Canada. Positive sector outlooks apply to structured finance in the US and Europe although there is concern in CLOs and US CMBS.

Fitch expects global economic growth to rise modestly to 2.6% in 2016, from 2.3% in 2015. This is partly explained by a smaller contraction in Brazil and stabilisation in Russia while China will continue to decelerate. Key risks to global growth are a more rapid China slow-down and a more pronounced impact from the US rate rise than forecast.

Consumption-led growth in the US has led to divergent monetary policies, with the US Fed tightening and other major central banks still loosening. With private and public debt in many emerging markets (EMs) at or near all-time highs, this implies greater sensitivity to economic growth slippages. The strengthening US dollar raises servicing costs for local-currency debt and risks causing asset quality weakening for banks, notably in Brazil, Russia and Turkey.

Low commodity prices are the greatest risk to EM sovereign ratings, as EMs are mostly net exporters of commodities, with the exception of India and China. Corporate sectors under pressure include oil, gas, metals and mining. The impact of sharp capex cutbacks in these industries are spreading to related sectors including outsourcers and machinery providers. Reduced revenues also have a negative impact on local and regional public finances in energy regions as corporate tax revenues decrease.

US corporates have leveraged up, partly as a result of share buybacks, and rating headroom is more limited. This could prove challenging as more negative credit conditions develop. Risk is concentrated in the energy sector, where we expect a US HY default rate of 11% in 2016.