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img_publication Watch

Country Risk Quarterly Report. Second quarter 2018

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During May we have seen the first overall increase in CDS spreads since Nov-2016. However, the recent turmoil in EMs has merely impacted on Global Risk Aversion (GRA). Our newly developed indicator of EM FX synchronization indicates that the recent depreciation in EM FX rates has had a relatively low level of synchronization among EMs currencies


Summary:

  • Turkey was downgraded by S&P and Moody’s. Spain was upgraded by S&P and Moody’s. Greece and Indonesia were improved by Moody’s, and Croatia by S&P
  • The recent turmoil in EMs has merely impacted on Global Risk Aversion (GRA). VIX and FTI have actually decreased during the quarter, while corporate and sovereign spreads have increased only slightly
  • Accordingly, our newly developed indicator of EM FX synchronization indicates that the recent depreciation in EM FX rates has had a relatively low level of synchronization among EMs currencies
  • During May we have seen the first overall increase in CDS spreads since Nov-2016. The rise was felt more intensely in LatAm, EM Europe, Periphery Europe and EM Asia. However, the rise of CDS spreads was not enough to compensate the tightening of previous months, and therefore, market pressure on ratings remains similar to the previous quarter in most cases
  • Our fundamentals-based rating (BBVA Research) is in line with the upgrade pressures seen in CDS sovereign markets in EU-Periphery and EM-Europe. On the other hand, our rating is slightly more positive in LatAm than both the agencies and markets. In EM-Asia, all three visions seem to currently coincide
  • Fiscal vulnerabilities seem to be worsening or improving too slowly across the board (in both DMs and EMs). The years-long private deleveraging process in Developed Markets (DMs) and Emerging Europe has lower their vulnerability indicators
  • Deleveraging continues in both DMs and EMs, with few exceptions in some DMs. The credit slowdown in China continues. Housing prices growth are displaying a very mixed pattern across the board and most recent data suggests a slowing down in several geographies
  • Our EWS of currency tensions coincides with our new EM FX synchronization index in suggesting that the recent repricing in FX EM markets was not a synchronized episode across EMs but a more differentiated event
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