Dagong Global Credit Rating Co., Ltd. (hereinafter referred to as “Dagong”) has
rated the debt repayment capabilities of the central governments of the
following five countries: Ireland, Finland, Uruguay, Kenya and Sudan based on
Dagong Sovereign Credit Rating Standard, and it officially launches the
sovereign credit ratings on these countries on December 6, 2010.
I.
Credit Rating Results and a Brief Analysis
The
geographical distribution of the 5 rated countries is: 2 European countries,
namely Finland and
Ireland; 2 African countries,
namely Kenya and
Sudan; and 1 South American
country, namely Uruguay.
In
terms of overall credit level, among the 5 countries rated this time, 2 of them
have above the investment grade (BBB- and above) of both the local currency and
foreign currency credit rating; and 3 countries have the speculative grade (BB+
and below). The credit rating grades of the local currency and foreign currency
are identical for the 5 countries. See table 1 for grade
details.
Table 1
The credit ratings of 5
countries
No. |
Country |
Local
Currency |
Foreign
Currency |
Rating |
Outlook |
Rating |
Outlook |
1 |
Finland |
AAA |
Negative |
AAA |
Negative |
2 |
Ireland |
BBB |
Stable |
BBB |
Stable |
3 |
Uruguay |
BB+ |
Positive |
BB+ |
Positive |
4 |
Kenya |
B |
Stable |
B |
Stable |
5 |
Sudan |
C |
Stable |
C |
Stable |
Dagong
gives a brief analysis on the sovereign credit risks of the 5 countries citing
the local currency as an example. In view that the recent sovereign debt crisis
in Ireland has aroused
investors’ extensive attention, the analysis is focused on the sovereign credit
risks of Ireland.
1.
The country with AAA local currency rating
The
country with AAA local currency rating is Finland.
Finland takes on excellent
comprehensive performance in the three basic elements of governmental management
capability, economic strength and financial strength. Although the government
had a small budget deficit after the global financial crisis, which increased
its debt burden, yet the risk is under control. In addition, the government
possesses a large amount of net assets and has a strong financing capability in
financial market. Thus, its sovereign credit level is still among the highest
rank in Dagong’s sovereign credit ratings. However, due to the problem in its
economic structure, Finland has been severely affected by
the financial crisis and the economic recovery is slow, posing
not-very-optimistic prospects for its future economic growth. Therefore, a
negative outlook is given.
2.
The country with BBB local currency rating
The
country with BBB local currency rating is Ireland. The
rating result reflects Dagong’s comprehensive consideration of the rapid
increasing debt burden of the Irish government and the basic elements affecting
debt repayment risks such as governmental management capability, economic
strength, financial strength and fiscal strength.
After
Ireland joined the Euro zone the real
estate sector and international financial services sector experienced a rapid
boom in the context of continuous low interest rate, and they became the major
driver for economic growth as a substitute for export. Affected by the global
financial crisis international hot money began to withdraw after 2007, resulting
in the fall of real estate prices and increase in bad debts, consequently
hitting the domestic consumption and investment, with the economy falling into
deep recession. In order to rescue the banking sector, the Irish government
injected a large amount of capital into several banks led by Anglo Irish Bank
and non-banking financial institutions, leading to a sudden increase in
temporary deficit; combined with the large structural deficit attributable to
the sharp reduction in tax, it is predicted that the debt burden of the Irish
government will be pushed to the high level of 96.9% of GDP by the end of 2010.
The
relief measures adopted by the EU and IMF saved the Irish government from
falling into the crisis of unsustainable fiscal revenues; however,
Ireland will still undergo a painful
adjustment period in the medium term, and the high risk status in debt repayment
capability will continue to exist. The key reasons are as follows: First, it is
difficult for the current export-driven economic recovery to effectively absorb
the unemployed population; the falling consumption and investment attributable
to the deleveraging process by residents, corporations and the government will
last for a considerable period of time; economic restructuring is needed to
resolve the high structural unemployment; but the drastic reduction in
investment greatly prolongs the time of adjustment. Second, the continued
decline of the real estate prices indicates that the risks in the banking sector
have not been fully exposed; the bailout plans of the government, EU and IMF are
conducive to enhancing the capability of the banking sector to withstand future
risks; however, it is likely for the banking sector to require more capital
supplement and rely on the European Central Bank and the government bailout to
maintain its operation since it will be very difficult to obviously change the
situation of lower real estate prices and higher unemployment rate before the
new economic structure and driver for economic growth that is able to increase
the employment appear. Third, although the government has adopted fiscal
austerity since mid 2008 and declared the detailed medium-term fiscal adjustment
plan recently, yet Ireland is confronted with a very
arduous task of financial adjustment. Dagong predicts that the debt level of the
Irish government will not be relatively stable until it is raised to about 110%
in the medium term.
Although
both Ireland and Greece (BB rating and stable outlook) have to seek multilateral
bailout, because they barely have the ability to finance from the market, Dagong
assigns a higher investment grade to Ireland compared with Greece on the grounds
that the well-developed manufacturing industry and sound educational scientific
research system play a significantly positive role in promoting economic
recovery in Ireland, in addition to the buffer mechanism provided by over 20
billion Euros government floating assets to ease the financing difficulty.
However, the strikes to the market by speculators increase the sovereign risks
in the whole Euro zone, pushing Ireland to ask for multilateral
assistance earlier.
The
shortage of international currency liquidity arose from the eruption of the 2007
U.S. financial crisis
directly shook the fragile national economic foundation in Ireland,
threatening the endangered private credit relations. Nevertheless, national
default is impossible in Ireland in a short term. The
United
States has initiated quantitative easing
monetary policy since November, 2010, which significantly strengthened the
speculative power of U.S. dollar. This measure, principally targeting at
Ireland’s national bonds, put
the fragile national credit relation of Ireland close to an unsustainable
situation. Therefore, Ireland
may have sovereign debt crisis, internally because of imbalance of the national
economic development and increasingly accumulated credit risk elements, and
externally because of the damage of additional issuance of U.S. dollar in a
large amount to the creditor-debtor relationship in Ireland. At present and for a long
time in the future, the fluctuation of U.S. dollar, the leading currency in the
world, is still the most important factor that affects the global macro economy.
Dagong believes the a comparatively stable external economic environment is
necessary as good development of creditor-debtor relationship can only be
gradually realized by effective measures for growing economy and cutting debts
for the highly-indebted countries in Euro zone. However, while U.S. QE policy
releases and speculative influence of U.S. dollar changes the expectation of
depreciation of U.S. dollar and appreciation of Euro, the public may dump Euro,
hold more U.S. dollar that results in depreciation of Euro. This will directly
ruin the credit relation already at stake in European countries and increase the
risks of sovereign crisis in Euro zone. Ireland, the country with substantial
conflict of creditor and debtor, might be the first to have national crisis
attributable to the influence of U.S. dollar.
Dagong
notices that the European bailout plan has entered the preliminary stage of
complete implementation. The European Financial Stability Facility will be
initiated in a short time to provide liquidity support for the countries with
debt crisis by financing. On December 2, the European central bank confirmed a
securities market project to purchase national bonds of Ireland and Portugal, a sign
of start of competition between European central bank and the dumping activity
of the market. It is predicted that with the continuous debt crisis in Euro
zone, the European central bank will further absorb the national bonds of the
countries in the periphery of Euro zone, in an effort to reduce the financing
cost through market in certain countries and maintain the sustainability of such
financing channel. Dagong will continuously focus on the relative measures by
European Union to see whether those measures can essentially change the
unfavorable government financing prospect for the countries in crisis, and will
make appropriate adjustment on the ratings, if necessary, based on observing
development trend of debt risks in different countries.
3.
The country with BB rating on local currency
The
local currency sovereign rating for Uruguay is BB+, reflecting that on one side,
Uruguay has significantly improved the operation framework of the domestic macro
economy by the economic system reform in recent years to reduce the fragility of
economic and financial system, especially to upgrade the ability to withstand
economic strike from some areas such as Argentina, contributing to the rapid
economic growth and strong management ability of the government. Meanwhile, the
government fiscal deficits are gradually reduced and the debts significantly
decline. On the other side, the high inflation and low investment scale restrict
the medium-term economic growth potential in Uruguay, and the
large debts of public sectors also affect its rating
level.
4. The country with B rating on local
currency
The
local currency sovereign rating for Kenya is B as restricted by domestic
uncertain factors. It is uncertain whether the national development strategy in
Kenya can be successfully
implemented, and the imbalance of economic development exists for a long time to
restrict the further economic growth. The financial development is relatively
backward in Kenya, insufficient to support the
real economy. While the fiscal stimulus policy continues, the fiscal deficit and
debt scale remain slow growing in the coming few years.
5. The country with C rating on local
currency
The
local currency sovereign rating for Sudan is C based on the comprehensive
consideration of its intense political situation, less developed economy and
finance, heavy government debt burden and weak foreign
reserves.
II
Comparison with Moody’s, Standard and Poor’s and Fitch
Compared
to the three U.S. credit
rating agencies, Dagong assigns distinct rating level on Ireland, and
almost the same rating levels on local currency of the rest four countries, as
shown in table 2:
Table
2 Difference Between Local Currency
Sovereign Ratings by Dagong and Three U.S. Credit Rating
Agencies
Country |
Dagong |
Moody’s |
Standard and
Poor’s |
Fitch |
Comparison |
Rating |
Outlook |
Rating |
Outlook |
Rating |
Outlook |
Rating |
Outlook |
Finland |
AAA |
Negative |
Aaa |
Stable |
AAA |
Stable |
AAA |
Stable |
Same |
Ireland |
BBB |
Stable |
Aa2 |
RUR- |
A |
Negative |
A+ |
Negative |
Lower |
Uruguay |
BB+ |
Stable |
Ba3 |
RUR+ |
BB |
Stable |
BB+ |
Positive |
Midst |
Kenya |
B |
Stable |
- |
- |
B |
Positive |
BB- |
Stable |
Midst |
Sudan |
C |
Stable |
- |
- |
- |
- |
- |
- |
- |
Note:
First, Dagong evaluates the sovereign ratings for 5 countries this time,
of which 4 have been rated by Standard and Poor’s and Fitch, and of which
three have been rated by Moody’s.
Second, rating
results of Moody’s and Standard and Poor’s are subject to the information
issued on December 1, 2010, while the rating results of Fitch are based on
information issued on November 19,
2010. |
The
accumulation of sovereign credit risks in Ireland has been
through a long-standing process. After access to the Euro zone,
Ireland continuously obtains
low interest financing facility to develop its international financial services
industry, which resulted in excess international hot money in
Ireland, expansion of external debts,
soar of prices in real estate market manipulated by both international and
domestic capital and large risk exposure of banking industry in land and
property development sectors. The three U.S. rating agencies have always
given Ireland AAA rating, the highest level during that period. The property
prices have started to drop in Ireland since Q4 2006, while the
economy has entered recession since Q1 2008. However, the three
U.S. rating agencies did not
adjust the ratings on Ireland until 2009. By now, the
government of Ireland
basically has no capacity to finance from the international market, its rating
still remains A or above according to the three U.S. rating
agencies. Dagong believes such rating result could not reflect the actual credit
status in Ireland due to its lagged
adjustment.
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