Emerging sovereigns may climb credit scale in 2010

LONDON (Reuters) - Investors on high alert next year for sovereign debt risks and further credit rating shocks could well find better value in the emerging markets than in those economies that are presently more highly rated, analysts say.

Turkey, Indonesia and Russia are among emerging sovereigns upon whom ratings agencies may look kindly next year, following a year in which developed markets have suffered more than emerging economies from ratings blues.

Previously untouchable highly-rated economies have crumpled during the global financial crisis which started two years ago, as ballooning debt burdens have made them a riskier proposition.

Most recently, ratings agency Fitch cut Greece's rating and put it on negative outlook, and Standard & Poor's put Greece on negative credit watch, indicating a downgrade may be imminent.

S&P also cut the ratings outlooks of Spain and Portugal, as the outer edges of the euro zone struggle with debt mountains.

Meanwhile, European Union hopeful Turkey enjoyed a rare double-notch upgrade from Fitch, and G20 member Brazil is now rated at the coveted investment grade -- opening up its markets to more risk-averse investors -- by all three major ratings agencies.

"The crisis has hit the higher-rated countries hardest, that's been a feature," said Brian Coulton, head of sovereign ratings at Fitch.

"Some of the key emerging markets have come through the crisis relatively well. Negative outlooks outweigh positives by a long way, but a number of negative outlooks have turned to stable this year, and more negatives may move to stable through next year."

IHS Global Insight, which tracks its own sovereign ratings alongside those of Fitch, Moody's and S&P, says the number of global sovereign positive ratings actions outstripped negative actions by a factor of 2:1 in the third quarter.

"This year, the biggest positive movements were in Latin America and Asia," said Jan Randolph, director of sovereign risk at IHS Global Insight.

"The most important story is Brazil, everyone rates it at investment grade."

Brazil is on stable outlook with S&P and Fitch but positive outlook with Moody's, although Moody's has said it will not decide on a possible upgrade until 2011.

TURKEY BOOST?

More imminently, Turkey could get a ratings boost next year, analysts say, following a two-notch upgrade by Fitch earlier this month to BB+.

Turkey is rated at Ba3 by Moody's and BB- by S&P. Meanwhile, Egypt is rated at BB+ or equivalent by all three agencies.

"Turkey is two notches behind Egypt, that's just ridiculous," said Tim Ash, head of emerging Europe research at RBS, citing a debt-to-GDP ratio of 80 percent for Egypt, compared with 45 percent for Turkey.

Market prices are reflecting a stronger view for Turkey's debt than for Egypt's, with Turkey's five-year credit default swaps trading around 45 basis points lower than Egypt's.

In Asia, Coulton at Fitch highlighted Indonesia and Philippines as having come well out of the financial crisis.

Indonesia's rating was recently given a positive outlook by Standard & Poor's, and the country was upgraded by Moody's this year.

"Indonesia should outperform the lower-yielding names on the back of strong debt management that has prevented a serious fiscal deterioration," UBS emerging markets strategists said in a client note.

In Europe, Fitch's Coulton said Russia had also come out of the crisis with fewer problems than anticipated.

Russia said on Wednesday it had spent 900 billion roubles ($29.80 billion) on anti-crisis measures this year, out of 1.3 trillion planned for the year as a whole.

But it was earlier this year seen at greater risk of having to bail out indebted corporates.

Higher oil prices have also helped Russia.

"The reserve position has improved significantly in the last few months in Russia," Coulton said.

The level of Russia's rehabilitation is reflected in investor enthusiasm for planned Eurobond issuance by the sovereign next year, which Russia initially said could total as much as $18 billion.

Russia is rated at BBB with a negative outlook by Fitch and S&P, and at Baa1 with stable outlook by Moody's.

Ukraine, which has had problems in its banking system and economy and is heavily dependent on International Monetary Fund aid, may qualify for an upgrade next year, analysts say.

The country is rated at CCC+ by S&P, B2 by Moody's and B- by Fitch.

Investors are focusing on presidential elections in January, with pre-election infighting currently blocking release of a $3.8 billion IMF tranche.

"If we see a clear victor who forms a government, the S&P CCC+ rating starts to look a bit aggressive," Ash said.

But for most of emerging Europe, which suffered during the financial crisis from overexposure to western European bank lending and a recession in the euro zone, there is little likelihood of ratings upside next year.

The best these credits can hope for is no further downgrades, after several downmoves this year.

"For eastern Europe, no change is good," said Ash. "Stability is not a bad thing."