S&P cuts Russia’s debt rating for the first time in six years.
Geopolitical risks continue to weigh on the RUB as the situation in eastern Ukraine worsens.
Assessment and outlook
Yesterday the rating agency Standard & Poor’s (S&P) cut Russia’s long- and shortterm FX debt ratings to junk level (BB+ and B from BBB and A-3 accordingly) preserving a negative outlook, as the country’s economic growth prospects have deteriorated and ‘monetary policy flexibility has weakened’. At the same time the country’s local currency debt ratings were cut to BBB- and A-3 from BBB/A-2.
S&P claims in its statement that other reasons for the downgrade are ‘rising external pressures and increased government support to the economy’. The agency is also seeing that ‘Russia’s financial system is weakening’ as a result of the falling RUB and the sanction war between the West and Russia having an impact on GDP growth. According to S&P Russia’s central bank’s aggressive monetary policy is weighing on economic growth allowing it to expand 0.5% annually in 2015-2018. The slumping oil price is causing a severe terms-of-trade shock. Capital outflows reached almost USD152bn in 2014 and we estimate that Russia’s corporate debt outstanding in 2015 is approximately USD160bn. Yet, due to the large RUB depreciation, the country’s budget is better balanced. At the same time the agency points out that the economic slowdown started ‘before the recent developments in the Ukraine’. The next rating publication on Russia will be released on 17 April 2015.
For similar reasons we cut our 2015 GDP forecast to -7.9% y/y from -1.8% y/y on 19 December 2014. Demand- and supply-side shocks will further curb fixed investments and have a significant impact on business sentiment and productivity growth hitting loan growth and private consumption.
The RUB saw significant pressure falling 4.6% against the USD after the statement was released. We expect the fall in the RUB, Russian stocks and sovereign bonds to continue this week. At the same time geopolitical pressure on Russian assets is rising, as fighting in Ukraine is escalating and the West is urging to introduce new sanctions. Yet, our main concern is Russia’s reaction to the rating cut and new sanctions when introduced.
This publication has been prepared by Danske Bank for information purposes only. It is not an offer or solicitation of any offer to purchase or sell any financial instrument. Whilst reasonable care has been taken to ensure that its contents are not untrue or misleading, no representation is made as to its accuracy or completeness and no liability is accepted for any loss arising from reliance on it. Danske Bank, its affiliates or staff, may perform services for, solicit business from, hold long or short positions in, or otherwise be interested in the investments (including derivatives), of any issuer mentioned herein. Danske Bank's research analysts are not permitted to invest in securities under coverage in their research sector.
This publication is not intended for private customers in the UK or any person in the US. Danske Bank A/S is regulated by the FSA for the conduct of designated investment business in the UK and is a member of the London Stock Exchange.
Copyright () Danske Bank A/S. All rights reserved. This publication is protected by copyright and may not be reproduced in whole or in part without permission.
Recommended Content
Editors’ Picks
EUR/USD stabilizes near 1.0800 as trading action turns subdued
EUR/USD holds steady near 1.0800 on Thursday and remains on track to end the day in negative territory following upbeat macroeconomic data releases from the US. The action in financial markets turn subdued as trading volumes thin out heading into Easter holiday.
GBP/USD extends sideways grind above 1.2600
GBP/USD fluctuates in a narrow channel above 1.2600 on Thursday. The better-than-expected Initial Jobless Claims data from the US and the upward revision to the Q4 GDP growth help the USD stay resilient against its rivals and limits the pair's upside.
Gold pulls away from daily highs, holds above $2,200
Gold retreats from daily highs but holds comfortably above $2,200 in the American session on Thursday. The benchmark 10-year US Treasury bond yield stays near 4.2% after upbeat US data and makes it difficult for XAU/USD to gather further bullish momentum.
XRP price falls to $0.60 support as Ripple ruling doesn’t help Coinbase lawsuit against SEC
XRP programmatic sales ruling by Judge Torres was completely rejected by another US Court that ruled in favor of the SEC in a lawsuit against Coinbase.
Portfolio rebalancing and reflation trades emerge into Q2
Yesterday’s price action pointed at a possible end-of-quarter portfolio rebalancing as the session saw the laggards of the quarter like Apple and Tesla gain, and the stars like Microsoft and Nvidia retreat.