Strong GDP growth, improving governance, and limiting the rise in public debt have been key factors for the few emerging market (EM) sovereigns that have bucked the trend and seen net upgrades over the past 10 years.
At Fitch Ratings, the average EM Long-Term Foreign-Currency Issuer Default Rating has declined by 1.3 notches in the 10 years to end-August 2021 to ‘BB’, or by 0.9 notches after adjusting for composition effects. On both measures, it has fallen further behind the average developed market sovereign rating.
In the five years to end-August 2021, the greatest upward rating movement was in Croatia, Serbia, and Ukraine by a net two notches each. For Croatia and Ukraine, this reflected just regaining notches lost in the previous five years. A further 14 emerging market sovereigns were upgraded by one notch.
Over the last 10 years, eight EM sovereigns have gained net upgrades of two notches: the Dominican Republic, Georgia, Indonesia, Jamaica, Peru, the Philippines, Serbia, and Vietnam.
Benin, Bulgaria, Ukraine, and Vietnam are the EM sovereigns most likely to be upgraded over the next two years, as signaled by their positive outlooks. Croatia also has a good prospect of being upgraded, as we expect it to adopt the euro in January 2024, which could lead to a two-notch upgrade.
Rating upgrades can follow if a country exits a default, economic crisis, or severe downturn. Three sovereigns are currently in Restricted Default: Lebanon, Suriname, and Zambia, and could see upgrades if defaults are cured, for example following debt restructurings, although this seems a long way off for Lebanon.
Strong growth in real GDP per capita without macro-financial imbalances, or strengthening sovereign balance sheets by running persistent current account and/or budget surpluses can support upgrades, as can a favorable global macro environment.
Ed Parker is the Head of EMEA Sovereign Ratings with Fitch Ratings