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Global sovereign downgrades set for a record year

Sovereign credit ratings are on track for a record number of downgrades in 2016, driven by the impact of lower commodity prices in emerging market economies.

This is important for institutional investors, who are often not allowed to invest in countries below a certain rating due to risk.

Fitch Ratings has made 14 downgrades this year. Seven of the 10 most commodity-dependent sovereigns rated by Fitch have been downgraded or are on ‘Negative Outlook’. All are emerging markets.

A commodities rally in the first half of the year led to an increase in market sentiment for emerging markets – yet Fitch said that public and external finances in a number of commodity-exporting countries were not yet aligned with the new structurally-lower price environment.

The UK was also downgraded, with Fitch stating that “the significance of the UK's pending exit from the EU is difficult to overstate”. The firm also said that Europe's political backdrop could have negative implications for sovereign ratings, as fiscal consolidation may drop further down the list of policy priorities.

“Comparatively high government debt levels are observed in several Eurozone sovereigns, and are likely to remain effective rating constraints,” said James McCormack, global head of sovereign ratings at Fitch.

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