Tomas Ragina
China’s credit rating may be downgraded by agencies in the coming quarters, Wells Fargo Economics said in analyzing potential moves for sovereign debt ratings in emerging markets.
Chile, Colombia and Mexico could also see negative ratings actions over the next 12 months, while India may be due for an upgrade, Wells Fargo (WF) Economics said Friday in a report updating its sovereign credit ratings framework.
WF Economics said its ratings methodology is similar to approaches at Moody’s and S&P Global Ratings ((S&P)). It also believes its methodology “may be even more forward-looking,” as it utilizes a rolling one-year outlook designed to consistently incorporate forecasts 12 months ahead of time. Its analysis covers the four quarters from Q3 2024, Brendan McKenna, international economist at Wells Fargo Economics, said in a note Friday.
Its findings include:
China
“Given the importance of China’s economy to the health of the global economy, a China rating downgrade fueled by deteriorating economic fundamentals would be notable,” McKenna said. Moody’s rates China at “A1,” and in late 2023, changed its outlook to negative from stable. S&P rates China with an equivalent “A+” rating with a stable outlook. “We believe a one notch downgrade can be delivered by both agencies,” McKenna said.
WF Economics said its framework signals a downgrade due to China’s (USD:CNY) public debt burden that’s likely to continue rising. “However, we also take into account contingent liabilities due to central government support of local municipalities and state-owned enterprises,” it said.
Chile
Chile (USD:CLP) is likely to experience more subdued growth, higher inflation and a further weakening of its public finance position over the next few years, McKenna said. While copper prices (HG1:COM) have jumped this year, weak demand and China’s broader economic prospects should weigh on Chile’s medium-term growth prospects, he said.
S&P rates Chile “A” with a negative outlook. Moody’s rates it “A2” with a stable outlook. WF’s framework assigns a sovereign credit rating equivalent to Baa1 on the Moody’s scale, and BBB+ on the S&P scale.
Colombia
Ratings for Colombia (USD:COP) may undergo “multi-notch downgrades” over the next 12 months, partially stemming from below-average economic growth and above-trend inflation. WF’s framework assigns a rating equivalent to Ba3 on the Moody’s scale and BB+ on the S&P scale, or two notches weaker than S&P’s rating and four notches below Moody’s.
Should Moody’s rating converge toward WF’s framework, Colombia would lose its final investment grade rating and trigger asset managers to sell Colombian exposures, McKenna said. Peso (USD:COP) depreciation pressures could intensify.
Mexico
Mexico (USD:MXN) earlier this month elected left-wing candidate Claudia Sheinbaum as its next president. Potential negative-ratings actions may stem from concerns about the implementation of constitutional amendments that erode Mexico’s governance structure and democratic process, WF Economics said.
Its updated framework currently doesn’t result in a rating downgrade. “However, should political and governance risks be combined with a disregard for fiscal consolidation efforts and/or a material disruption to nearshoring activity – which are both entirely possible – our framework would, in fact, downgrade Mexico’s rating by one notch,” McKenna said.
One-notch downgrades would pull Mexico to the lower end of the investment-grade scale.
India
India (USD:INR) can land a one-notch rating upgrade from at least one, if not both, of the major rating agencies, WF said. India’s general election unexpectedly resulted in Prime Minister Narendra Modi’s ruling BJP losing its majority. Modi will now govern under a coalition.
“While a coalition government introduces new risks to our fiscal consolidation view, we remain optimistic that the fiscal deficit will narrow over time and the government debt-to-GDP ratio can stabilize,” WF Economics said. McKenna said the framework’s rating upgrade is consistent with S&P recently revising its outlook to positive on its “BBB-” rating, the lowest level of investment grade.
