GLOBAL – The world’s top rating agencies have said that the sharp drop in oil prices, if sustained, could cause a wave of sovereign downgrades as well as heavy multi-notch rating cuts to junk-rated oil and gas firms.
According to Jan Friederich, Fitch’s top Middle East and Africa sovereign analyst, the recent plummeting of oil prices was putting countries from Saudi Arabia, Iraq and Oman to Nigeria and Angola were at a disadvantaged position.
“Countries that are in a somewhat vulnerable external position and have a fixed exchange rate are of course particularly vulnerable,” Friederich added.
S&P on the other hand warned that, “It is likely rating actions (for oil and gas production companies) in the investment-grade category could be more severe than during the last cycle.”
“For the high-yield segment, in particular, issuers without hedges, those who face upcoming maturities, and are somewhat squeezed on borrowing-base revolving credit facilities will most likely face multiple notch downgrades,” it added.
S&P Global also slashed its average Brent oil price assumption for the year to US$40 per barrel, warning too that some junk-rated oil and gas firms could face multi-notch downgrades.
Friederich noted although Saudi Arabia’s financial reserves and its sovereign wealth fund provided a buffer, there was not “infinite leeway” in the country’s A (stable) rating for the buffers to disappear.
He added that continued rise in government debt in Oman “would be a concern” , while Nigeria’s B+ (negative) rating could face problems if a prolonged attempt to defend the country’s currency peg ate heavily into its international reserves.
Fitch analysis shows that countries where oil generates more than 70% of foreign-currency income like Angola, Iraq, Suriname and Gabon were more exposed compared to others.
Elsewhere, Mexico could be hurt. “It has a significant oil sector and is closely connected to the U.S. economy,” Gill’s colleague Joydeep Mukherji said, also citing the problems posed by the Coronavirus.
