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Why 2016 may be a record year for rating downgrades

2016 is set to be a record year for sovereign credit rating cuts, driven largely by the hit from lower commodity prices, Fitch Ratings said on Thursday.

Fitch — one of the three main ratings agencies — downgraded 15 countries in the first half of 2016. Plus, 22 countries are on Negative Outlook, meaning they are at risk of cuts in the future. This compares with a full-year peak of 20 downgrades in 2011 — so it looks like this year's final total of downgrades by Fitch may set a new record.

Rough time ahead, trouble
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"Lower commodity prices continue to be the single most important factor responsible for downward sovereign ratings momentum," Fitch said in a report on Thursday.

Major oil producers downgraded this year by Fitch include Nigeria, Kazakhstan, Saudi Arabia and Brazil. The agency also sliced the U.K.'s rating last month following the country's vote to quit the European Union.

"Seven of the 10 most commodity-dependent sovereigns rated by Fitch have been downgraded in 2016 or are on Negative Outlook. All are in emerging markets," the agency said.

Light crude oil futures for August are trading at around $48 a barrel, following a partial rebound this year after a sharp rout between mid-2014 and early 2016.

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Metal commodities, notably gold, are also in recovery.

"The partial recovery in commodity prices in the first half of 2016 has led to improved market sentiment towards emerging markets, but not necessarily to improvements in sovereign credit fundamentals. Public and external finances in a number of commodity-exporting countries are not yet aligned with the new structurally-lower price environment," Fitch said.

The agency added that the importance of the U.K.'s Brexit vote was "difficult to overstate" for Europe.

"Fitch believes developments in the U.K. make it more probable that populist or euroskeptic movements find greater support elsewhere in the EU, providing added impetus for political fragmentation and polarization trends that became evident in the aftermath of the euro zone crisis … Europe's political backdrop could have negative implications for sovereign ratings, as fiscal consolidation may drop further down the list of policy priorities," it said.

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