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Sovereign risk sees 2008 crisis level swing

Risk
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The outlook for the creditworthiness of sovereign nations has worsened dramatically since the middle of last year, according to rating agency Standard & Poor's (S&P), in the biggest swing in sentiment since the depths of the 2008 financial crisis.

Among the 131 countries that the agency rates globally, 25 had "negative" outlooks at the end of 2015, versus eight that has a "positive," it stated in a new report on Wednesday morning. A negative outlook means that the agency predicts that its creditworthiness is likely to be downgraded in the future and thus increase the level of risk associated with investing in that particular country.

"The outlook balance - positive minus negative outlooks - has dropped to -17 from the seven-year high of -4 in June 2015," said Moritz Kraemer, Standard & Poor's chief rating officer for sovereign ratings, said in the report.

"This constitutes the most negative six-monthly swing in the outlook balance since December 2008."

Delving further into the data, S&P stated that global sovereign rating downgrades are therefore likely to outpace upgrades in 2016 and the dominance of downgrades expected to accelerate this year compared to the last.

Negative outlooks have outnumbered positive outlooks since early 2008 but the trend had been upwards since 2013 until this new data released on Wednesday. It also highlighted that the average long-term sovereign credit rating had fallen by over one notch since the financial crisis. The average rating is now 'BBB-' and 'BBB', compared with just below 'BBB+' in 2008.

This is still above speculative grade or junk debt which refers to bonds that carry a rating of 'BB' or lower from Standard & Poor's. They have a higher risk of default compared to investment-grade debt but give a better return for investors as yields are higher.

Over the past year, the outlook balance has deteriorated in all global regions except Asia-Pacific, S&P also said on Wednesday. "The deterioration was most pronounced in the Middle East, Commonwealth of Independent States (CIS), and Africa," it added in the press release. "Latin America and the Caribbean have seen a more moderate deterioration during 2015, as has Europe."

Bill Blain, senior fixed income broker at Mint Partners, told CNBC via telephone that with the European Central Bank's asset purchasing program, sovereign ratings in the region are likely to remain robust in 2016. However, he said that there were "clearly pressures" on Middle Eastern and African states.

"You've got to be every aware of what's going on," he urged investors when looking at African bond issuance. He also cited the current row between Iran and Saudi Arabia as a clear challenge for sovereign states and investment in the region.