Archive for the ‘Rating agencies’ Category

Don’t Forget Nigeria…

August 6, 2009

…Africa’s second largest economy and a potential rising regional power.

Nigeria, with about $215 billion in GDP last year, follows South Africa and leads Egypt in Africa in terms of the size of its economy, but lags both countries in wealth per head, with roughly $1350 of GDP per capita.  Nigeria relies very heavily on oil exports to fuel its economy.  Recent high oil prices have provided this classic developing country — with its poverty, mineral wealth, political instability and corruption, as well as reforms and emerging institutions —  with strong GDP growth and a strong external balance sheet (foreign exchange reserves in excess of government liabilities to foreigners).  With 155 million people, 250 ethnic groups, many languages, and a 50%-40% Muslim-Christian divide (view map below), this simmering rising power in West Africa is one to watch, if not next year, then some time this century.  Check out the CIA Factbook on Nigeria.

Of note is the ongoing conflict between the government and Islamic militants, putting Nigeria right smack on one of Huntington’s fault lines between civilizations.  See this article on recent unrest

Nigeria: At the Faultline Between Islam and Christianity  Source: http://www.getreligion.org/wp-content/photos/NigeriaStatesMap.gif Nigeria: At the Faultline Between Islam and Christianity Source: http://www.getreligion.org/wp-content/photos/NigeriaStatesMap.gif

Of interest as well is Fitch’s report on Nigeria, published last month, when the agency affirmed the country’s sovereign ratings.  See below.

“Fitch Affirms Nigeria at ‘BB-‘/’BB’: Outlook Stable   

03 Jul 2009 6:30 AM (EDT)


Fitch Ratings-London-03 July 2009: Fitch Ratings has today affirmed the Federal Republic of Nigeria’s Long term foreign and local currency Issuer Default Ratings (IDR) at ‘BB-‘ and BB’ respectively. The Outlook is Stable. At the same time, Fitch has affirmed the Short-term foreign currency IDR at ‘B’ and the Country Ceiling at ‘BB-‘.

“Nigeria’s strong sovereign balance sheet is the main support to its ratings. Although weakened by a major reserve loss since September 2008, its balance sheet still stands out amongst its rating peers,” says Veronica Kalema, a Director in Fitch’s Sovereign Department.

“Earlier banking sector consolidation also resulted in a well-capitalised banking system, which together with Nigeria’s strong overall and public net external creditor position and low government debt, have helped cushion the economy against the collapse in oil prices, the global recession, a reversal of capital flows and the banking sector’s exposure to a sharp fall in equity prices. With some signs of global stabilisation now apparent and a recovery in oil prices, Nigeria looks likely to weather the shocks,” adds Kalema.

The government moved swiftly to base the 2009 budget on a lower benchmark oil price of USD45/barrel (Fitch has a forecast of USD55/barrel for 2009 and the oil price is currently around USD70/barrel). Nevertheless, oil production shortfalls below the budgeted 2.3 million b/d continue to present a serious revenue challenge. However, this will be offset by the higher- than- budgeted oil price, reduced disbursements from the Excess Crude Account (ECA) and likely under-execution of the Federal Government (FG) budget. The domestic debt market provides financing flexibility for the FG and a few sub-nationals that have started to tap it to fund development spending. Nevertheless, sub-nationals face a serious revenue squeeze, and there is a risk that this will result in further disbursements from the ECA. Fitch forecasts small budget deficits at the FG and consolidated government levels and continuing low public debt of 12% of GDP in 2009, well below the ‘BB’ median.

The Central Bank of Nigeria (CBN) at first used reserves to support the naira in the face of lower oil revenues and capital outflows in the second half of 2008. Amid some confusion as to its policy goals, which heightened speculative pressure, CBN starting in late November eventually engineered a roughly 20% depreciation and stabilised the market, albeit by resorting to a temporary reversal of foreign exchange liberalisation. The naira is now at a more realistic rate consistent with lower oil prices and restrictions have begun to be eased. Despite a significant depletion of reserves by 28% to USD44.8bn in May 2009 since the peak of USD62.1bn in September 2008, low foreign liabilities of both the public and private sectors mean that Nigeria’s external balance sheet remains robust and is still one of the strongest in the ‘BB’ category. The recent increase in oil prices, if sustained, should slow the pace of reserves depletion. However, the reserves cushion has been eroded and any renewed bout of lower oil prices would likely trigger further downward pressure on the exchange rate, accelerate reserves depletion and is likely to bring negative rating action.

Unlike other countries in the region, Nigeria’s banking system has been under strain due to margin loan exposures to the sharp fall in equity prices. The loss of confidence together with lower oil revenues has also resulted in a liquidity squeeze on the money markets which, despite measures to inject liquidity, is still not fully alleviated. Although the system’s high capitalisation means that it can absorb the bulk of the losses without any support from the sovereign, the problems have exposed severe weaknesses in banking regulation and risk management. These will be the key focus of the new central bank governor, Lamido Sanusi, who as a former banker is well-qualified to address them so as to restore confidence in the financial system so that it can better support real sector development.

Nigeria’s ratings are hampered by data weaknesses and lack of transparency in several key areas including public finances, the balance of payments, international reserves and the banking system. Improvements are essential to enhancing creditworthiness.

Following an average of 6%+ growth in 2004-2008, in 2009 growth will slow to around 3%, reflecting much lower fiscal spending, private credit growth, remittances and oil prices/production. However, this will be in line with regional growth and much higher than the ‘BB’ median. Reforms and investment in infrastructure have slowed under the current administration, although there are now signs of revival. Niger Delta (ND) insecurity has further reduced oil production this year and is an ongoing rating constraint. More broadly, it has adverse implications for the government’s power and gas sector strategies necessary for further diversification and raising Nigeria’s growth potential. Improvements in the ratings will also depend on sustaining non-oil growth and raising per-capita income by addressing infrastructure through investment and reforms.

A copy of the sovereign report on Nigeria will be available shortly on Fitch’s website http://www.fitchratings.com.

Contact: Veronica Kalema, London, Tel:+44 (0) 20 7417 6336; Richard Fox, +44 (0) 20 7417 4357

South Africa: Managing the economic crisis

July 30, 2009

South Africa: Africa's Largest Economy  Source: www.thecommonwealth.org

Africa’s largest economy, with US$276 billion in GDP, is the continent’s rising power.  With 48 million people, it is not the continent’s most populous, with a lower population than oil-rich Nigeria (155 million) and Egypt (80 million), the world’s most populous Arab nation.  But South Africa is richer than these countries, in spite of its more skewed income distribution — South Africa has a Gini index of income inequality of 57.8, similar to Brazil’s, and worse than Egypt’s 34 and Nigeria’s 43.7.   And, with unemployment of 23%, this regional power has substantial structural challenges.

A national election in April-May 2009 occurred smoothly, after an intra-ANC power struggle resulted in the resignation of President Mbeki, post-Apartheid South Africa’s second president, following Nelson Mandela, the country’s George Washington and a major moral force in the world.  The ANC holds nearly two-thirds of the seats in the National Assembly, lording over a few much smaller opposition parties.  The ANC, which has held power for fifteen years, has much more to do to overcome the country’s nagging social problems and unleash its growth potential.

Fitch Ratings affirmed South Africa’s sovereign ratings this week, with the foreign currency rating of BBB+, the same as Libya’s ratings, but higher than all the other sixteen African nations Fitch rates.  South Africa is rated the same as Mexico, a notch higher than Russia, and two notches higher than Brazil and India.  Its credit strengths include low, though rising, public debt and good, though not stellar macroeconomic performance.  The economy grows less rapidly than other BBB sovereigns, expanding an average of 4.7% per year in the five years through 2007.  Its public debt is on the rise, given much needed infrastructure spending and a severe skills shortage.  Its banking system is strong relative to other emerging market economies (EMEs).  The economy has experienced only a modest slowdown as a result of the global economic crisis.  South Africa’s ratings were given a Negative Outlook in November 2008, along with many other EMEs, as Fitch concluded that the so-called “decoupling” of these economies from what was going on in the developed world was not a reality.  Since then, South Africa seems to have weathered the storm fairly well, with capital inflows resuming, though Fitch is taking a wait-and-see attitude.   South Africa’s wide current account deficit, at over 7% in recent years, financed in part by volatile portfolio capital, leaves the country vulnerable to external shocks.

Fitch published a report on South Africa this week, and its accompanying press release can be found below. 

“Fitch Affirms South Africa at ‘BBB+’; Outlook Remains Negative   

27 Jul 2009 6:23 AM (EDT)


Fitch Ratings-London-27 July 2009: Fitch Ratings has today affirmed all of South Africa’s sovereign ratings. The country’s Long-term foreign currency Issuer Default Rating (IDR) is ‘BBB+’ and the Long-term local currency IDR is ‘A’, while the Short-term foreign currency IDR is ‘F2’. The Outlooks on the Long-term foreign and local currency IDRs remain Negative. Fitch has affirmed the Country Ceiling at ‘A’.

“South Africa is weathering the global recession and credit crunch quite well compared to its rating peers,” says Veronica Kalema, Director, Fitch’s Sovereign group. “Although GDP will fall by 1%-2% this year, this will be far less than most ‘BBB’ category sovereigns. Political risk has also eased since April’s smooth transfer of power to President Zuma. However, the post-election political landscape and its implications for policy is still unfolding, at a time when the budget deficit is rising sharply and the current account deficit, while diminished, remains large and presents continuing financing challenges.”

South Africa’s ratings have been on Negative Outlook since November 2008 when Fitch took negative rating action on a number of major emerging markets in the face of the sudden and fast deterioration of the global economic environment in the second half of last year. South Africa has been affected mainly through trade and capital flows channels; there were large portfolio outflows in Q408 and a sharp weakening of the currency. Though portfolio flows have since returned and the rand has recovered most of the ground lost since March 2009, the combined impact of global recession and a domestic cyclical downturn will be more broadly felt in 2009. Fitch’s earlier forecast of recession has been confirmed, but the agency now forecasts that GDP will contract by 1%-2% in 2009.

Revenue shortfalls mean the budget deficit could approach 6% of GDP in the current fiscal year (FY09: April 2009-March 2010) and remain high, albeit declining, in the subsequent two years. Fitch therefore expects the government debt ratio to rise from a low of 27% in FY08 to around one-third by FY10. External debt ratios are also forecast to rise as borrowing is stepped up to finance public sector investment and the current account deficit (CAD).

Several years of prudent fiscal policy give South Africa fiscal space to weather a temporary increase in the budget deficit without the debt ratio exceeding ‘BBB’ category medians. However, the increase in debt of the broader public sector, which includes non-financial public enterprises, will be much starker, as infrastructure spending is stepped up. In the longer-term, this investment will help the country ease some of the structural constraints to a higher growth potential, which will be key to improvement in the sovereign rating.

Falling inflation and slower private credit growth in response to earlier monetary tightening is also allowing a monetary stimulus. Interest rates have been reduced by 450 basis points since December. This will help support growth in H209 and into 2010. In addition, due to tighter regulation and supervision, the South African banking sector has been relatively insulated from the global credit crunch and although banking sector asset quality and profitability are worsening in the economic downturn, the sector is better placed than most “BBB” country banking sectors to support the recovery.

Some of the imbalances in the economy are starting to ease, with credit growth slowing sharply and domestic inflationary pressures abating. The CAD is also forecast by Fitch to narrow, though to a still relatively high 5%-6% of GDP. As this will not be fully covered by increased public sector borrowing and foreign direct investment, financing will still rely on portfolio flows, presenting a persistent risk to macroeconomic stability given continued volatile global risk appetite. High wage pressures also present a challenge to public finances, inflation and competitiveness.

A smooth political transition after the fourth post-apartheid general election, the most vigorously contested so far, has reduced short-term political uncertainty, strengthened democracy and should ease investor concerns as the country navigates the downturn. However, political risk has not diminished completely. Expectations have been raised and sporadic riots are a reminder that service delivery, which is a priority for the new government, has the potential to threaten political stability unless effectively addressed.

South Africa’s ratings could come under further downward pressure if economic recovery is weaker and more protracted than Fitch currently expects, leading to a worsening of key credit indicators. A weakening of the policy environment would also be ratings negative. However, if the country navigates the downturn over the next 12 to 18 months without a sharp deterioration of its credit metrics and with macroeconomic stability intact, the Outlook would be revised to Stable.

Contact: Veronica Kalema, London, Tel: +44 (0) 20 7417 6336; Richard Fox, +44 (0) 20 7417 4357.

Media Relations: Peter Fitzpatrick, London, Tel: + 44 (0)20 7417 4364, Email: peter.fitzpatrick@fitchratings.com.

Fitch’s rating definitions and the terms of use of such ratings are available on the agency’s public site, http://www.fitchratings.com. Published ratings, criteria and methodologies are available from this site, at all times. Fitch’s code of conduct, confidentiality, conflicts of interest, affiliate firewall, compliance and other relevant policies and procedures are also available from the ‘Code of Conduct’ section of this site.”

Are Status-quo Powers’ AAA ratings vulnerable?

June 11, 2009

Standard & Poor's Logo    Source: Bloomberg

S&P thinks so.  Moody’s and Fitch do not.

Actually, it is more nuanced than that.  A number of what we might call Status-quo or even declining, though still formidable, great powers — including the U.S., U.K., Germany and France – have sustained dramatic negative consequences from the global recession, including rapidly rising government debt levels.  It is a time of testing our assumptions about what makes a great power, what makes a strong economy, and what makes a wealthy society.  And, however painful, we must revise our assessments of relative power and sovereign creditworthiness as needed.   

No doubt such rising powers as China, India and Brazil are poorer – especially in terms of per capita income, but among advanced countries, the economic growth outlook over the medium term looks dismal, as government seeps into more corners of the economy, controlling banking systems and industrial companies, which if not reversed, could eventually stifle private initiative.  In addition, if gaping government deficits are reversed over the medium term via higher taxes, rather than through spending cuts, the government’s stranglehold on the economy will persist.  No matter what, things should get a lot worse before they get better.  Whether or not they get better is in the hands of policy makers.

The U.S. and its allies in Europe are undergoing exactly what Paul Kennedy warned against over twenty years ago in his book, The Rise and Fall of the Great Powers.  Sovereign financial solvency is the foundation on which military and political power can be projected, and this foundation crumbles when governments ignore deteriorating finances.  Governments today must act quickly to cut deficits, once signs of a durable recovery are clear.

The rating agencies remain relatively sanguine.  With the exception of S&P, they don’t expect the major countries to lose their coveted AAA status, as Japan did over a decade ago.  Moody’s even points out that if all AAA’s deteriorate together, they can all remain AAA because ratings are comparative.  However, what is required right now is to compare these AAA’s to lower-rated credits, for example, to such emerging markets as China and Singapore, Hong Kong, Korea and Saudi Arabia.  In spite of what a revision of the relative assessment of, say, the U.K. versus Kuwait might say for how wrong sovereign analysts were in the past, this reassessment must be done.

As for the U.S. and the U.K., the two economies experiencing the textbook example of the current crisis — with declining real estate values, indebted consumers, and failing banks — Fitch Ratings says they:

“possess strong capacity for adjustment, thanks partly to supply-side flexibility, a track record of fiscal consolidation, as well as exceptionally strong balance sheet and financing flexibility.”

 and,

 “Benchmark borrower and reserve currency status are two key features of this financing flexibility.”

 About the U.K. and the U.S., Moody’s says, they:

 “are being tested because of a shock to their growth model and large contingent liabilities. However, in our opinion, these countries display an adequate reaction capacity to rise to the challenge.”

Yet S&P a couple of weeks ago revised the Outlook on the U.K.’s AAA rating to Negative, saying that:  

“in light of the challenges to strengthen the tax base and contain public expenditures, the U.K. government debt burden could approach 100% of GDP by 2013 and remain near that level thereafter. The rating could be lowered if we conclude that, following the forthcoming general election, the next government’s fiscal consolidation plans are unlikely to put the U.K. debt burden on a secure downward trajectory over the medium term.”

S&P, in its report of June 4, forecasts the U.K.’s government debt burden to rise above most other AAA’s, including the U.S., by 2011.  Although the U.K.’s exposure to the current crisis is similar to America’s, its boom in credit to the private sector surpassed that which occurred in the US, with domestic credit to the private sector (and public corporations) representing approximately 200% of GDP in the U.K. versus approximately 150% in the U.S. and a AAA median closer to 130%.   The run-up in U.K. government debt is expected to be even more dramatic than in the U.S.   

Likewise, the U.K.’s GDP growth outlook looks worse in the coming years than its AAA peers’.

Paul Kennedy warned us that “The relative strengths of the leading nations in world affairs never remain constant, principally because of the uneven rate of growth among different societies and of the technological and organizational breakthroughs which bring a greater advantage to one society than to another.”  And, that history shows, “a very significant correlation over the longer term between productive and revenue-raising capacities on the one hand and military strength on the other.”

Kennedy argued that:  1) competition and commercial advances in western Europe in the centuries up to the 16th allowed this region to eclipse other power centers – Ming China, the Ottoman Empire, Mogul India, Muscovy, and Tokugawa Japan – which suffered from excessive centralization of authority; 2) the Habsburgs over-extended themselves militarily relative to their weakening economic base in the 150 years up to the mid 17th century; 3) Great Britain emerged as an economic superpower and a military power that could balance rivalries in Europe, by virtue of innovation in banking, shipping and manufacturing; 4) rapid shifts in economic power up through the turn of the 20th century made for unstable relationships among the rising and status-quo powers; and 5) the the U.S. economy has been in relative decline since the middle of the 20th century with the emergence of the rising powers. 

 The more rapid the shifts in relative power, the more unstable the international system can be – risking war – as the distribution of authority and responsibility rushes to catch up with power realities.  The relative decline of such powers as the U.S. and Europe over the long term cannot be avoided, as poorer nations such as China gain technological know-how to rapidly increase per capita income.  However, the speed and size of the relative decline and its management (i.e. through diplomacy) will determine how shocking this change will be (i.e. through war or through peace). 

Which is all to say that AAA sovereigns, such as the U.K. and U.S., would be well-advised to seek substantive fiscal consolidation (read: cut deficits, especially through spending cuts), once there is confidence the worst of the financial crisis is over.

See:  Standard & Poor’s report on the United Kingdom of June 4, 2009, Moody’s report “How Far Can Aaa Governments Stretch Their Balance Sheets” of February 2009, and Fitch’s report “High-Grade Sovereigns and the Global Financial Crisis” of March 17, 2009.

From BRIC to BIC…or even IC?

June 8, 2009

BRIC leaders meeting last year.  Source: www.corporate-eye.com

The Economist published an article this week suggesting that Russia’s slide into recession this year – due to lower oil prices, capital flight, weak banks and greater state involvement in the economy — could mean the fabled BRICs will become BICs. Of the four BRICs that made it into Goldman’s arbitrary moniker for major emerging market economies, Fitch Ratings forecasts only China and India will grow this year. Does that mean the BRICs should actually be the ICs? Does Brazil’s shrinking economy also knock Latin America’s largest country out of this select group? Somehow IC doesn’t sound as good as BRIC. Before the global financial crisis, some had said that Brazil had hit a BRIC wall, due to its much worse economic growth performance. I guess that would have been RIC, right?

Fitch Ratings forecasts Earth’s economy will contract 2.7% this year, driven by a nearly-unprecedented shrinkage of the major advanced economies by 3.8%, much worse than the zero growth of the 1975 and 1982 global recessions. Russia is likely to contract by about 3%, Brazil by a little over 1%, while China and India expand by 5-6% each (slow for these countries). Russia’s contraction is driven by its dependence on energy exports, the price of which has fallen markedly since highs last year. However, should the recent push upward in the price of a barrel of oil to nearly $70 persist, Russia’s contraction this year could be more muted.

As noted, Russia is also buffeted by weak banks, capital flight and the heavy unmet external financing needs of the private sector. In addition, as The Economist points out in an article likening Putin’s Russia to the Ottoman Empire, the greater intrusion of the state in the economy and the corporatist corruption of Putin and his men have stymied, though not uprooted, private entrepreneurship in Russia.

The comparison between Russia and Brazil is interesting. Fitch rates Russia’s sovereign debt “BBB” with a Negative Outlook, and Brazil a notch below at “BBB-” with a Stable Outlook (the Outlook reflects the likely direction of the rating within two years). India is also rated “BBB-” with a Stable Outlook. And China, in a class by itself with its $1.8 trillion in reserves – perhaps Goldman’s next appellation should simply be C – is rated “A+” with a Stable Outlook.

But as I said in a previous note about Moody’s, ratings are notoriously sticky. Brazil is looking better than Russia these days. Its economy is more market-oriented and better structured. Its exports are much more diversified. Its domestic market is stronger, as are its banks. Its only negatives vis-à-vis Russia are: its higher government debt, though its deficits are lower than Russia’s because the latter relies on volatile oil to balance its books; and, Russia’s stronger external balance sheet, i.e. excess of foreign exchange reserves over money it owes foreigners. However, Brazil’s balance between external assets and liabilities is near zero — pretty darn good — so I’m not sure Russia is so far ahead on this front. India likewise has a heavy government debt burden and fiscal deficits (both larger than Brazil’s).

India’s and Brazil’s fiscal woes emanate out of their tradition of coalition politics, a dynamic described in an earlier post. India now has the potential to improve its fiscal performance, given the strength of the Congress Party after last month’s elections. Congress should require less pork to distribute to keep its coalition together. India likewise has external assets in excess of liabilities, but not to as great an extent as Russia. Both Brazil and India benefit from a relatively closed economy (at least during a global meltdown) and a strong domestic market. (China’s openness to trade has become a major vulnerability in this crisis.) So perhaps the ratings of both Brazil and India should equalize with or even best Russia’s. Let’s wait and see.

Fitch regularly publishes an interesting report on banking sector risks across the countries it rates. The last one came out May 11, 2009. They assign a letter grade and a number rank based on the health of a country’s banks and vulnerability to shocks. The letter grade (A-E) is an average of the credit quality of the nation’s banks. The number (1-3, 3 being the worst) reflects the vulnerability of the country’s banks to financial shocks from asset prices (including real estate), excessive growth in bank lending, and exchange rate movements. The risk indicators for the famed BRICs are as follows:

Brazil C-3

Russia D-3

India C-2

China D-1

By this measure, India may be the least vulnerable to a banking crisis. China’s score of 1 for financial shocks is good, but may change given the breakneck growth in bank lending of late. China’s banks are fairly weak, given heavy policy lending to state-owned enterprises. Russia’s banks are also weak and prone to shocks. Fitch’s banking sector indicators were always much better in the advanced industrialized countries than in emerging markets in the past. In late 2006, the US and UK were both B-2, and now they’re both C-3, same as Brazil. Some powers rise and some powers fall.  My email is roger.scher@gmail.com.

Moody’s: Benign view of Latin America

May 20, 2009

Moody’s analyst Gabriel Torres penned a nice report on the impact of the global financial crisis on the 27 sovereign nations his firm assigns credit ratings to in Latin America and the Caribbean (email me for a copy — roger.scher@gmail.com).  He joined two of his colleagues in an informative conference call today to discuss the report and respond to investors’ questions.  Moody’s takes a relatively benign view of the impact of the global financial crisis in the region, though the global rating agency believes Mexico, due to its integration with the US economy and its structural weaknesses, remains most vulnerable to deterioration and a possible downgrade.

Torres outlined four channels by which emerging market countries are affected by the global crisis:  remittances (cash sent home by nationals working overseas), exports, capital inflows, and commodity prices.  While countries in the region have been negatively impacted through all four channels, Mexico has been hit hardest.  Most other countries, notably Brazil and Peru, have been in a relatively strong position to sustain the shocks.  Ironically, Latin America is best-prepared for the planet’s worse financial crisis in years (with generally high levels of foreign exchange reserves, reaped during the boom in commodity prices earlier this decade).  Rising interest rates and recession in the developed world in the eighties and nineties toppled many Latin countries; however, the strides made in improving public finances, floating exchange rates, and cleaning up banks have made America’s partners in the western hemisphere more resilient to handle this crisis.  Of note was the point Torres made that, if their benign view is wrong over the next 18 months, it will be because of problems in the banks that are not apparent today.

Moody’s reports that, since the onset of the crisis, Latin American and Caribbean sovereigns sustained negative rating actions in only 5 out of 27 cases, versus 12 out of 21 in Eastern Europe.  Similar trends can be found at the other major rating agencies (S&P and Fitch).  See Moody’s Sovereign Ratings.  This is partly due to the fact that the rating agencies may have over-rated Eastern Europe (brushing aside gaping current account deficits because they were financed by FDI) and under-rated Latin America (over-weighting the region’s poor credit history and discounting its burgeoning fx reserves). 

Finally, ratings are notoriously sticky.  This has been part of the criticism leveled at the agencies for rating real estate transactions too high (some of them AAA).  Because of all the notches in the ratings scale and the inability to take a binary or at least a less “granular” view of risks, agency analysts have a hard time changing a view dramatically on a country (or any other credit) in a short time frame.  In short, the rating agencies are not nimble.  They are prisoners of their ratings scale.  See an Economist article on the agencies and a Reuters article on Goldman’s new product that bypasses credit ratings.

Hence, although Mexico is on a deteriorating trend — it is running out of oil, which represents about a third of government revenue, and politicians won’t liberalize the energy sector or widen the tax base — and Brazil is on an improving trend — it has become a net oil exporter and has very strong fx reserves, the former is rated Baa1, fully three notches above the latter, at Ba1.  Rapid downgrades and rapid upgrades are not possible at a rating agency – until, of course, it is too late — because what does that mean?  It means the analyst was wrong.