Fitch Ratings has published a special report entitled, 'Effect of Low Oil Prices on Emerging Market Corporates.' This report takes a look at the cash flow impact upon corporates of lower oil prices in Brazil, China, India, Indonesia, Mexico, Russia, Turkey and South Africa. The impact is positive throughout Asia but neutral in Latin America. Throughout EMEA, the results are mixed.
Fitch believes Brazilian and Mexican corporates can expect no positive impact in terms of credit quality despite low oil prices.
'In Brazil, prices are highly regulated and have risen in U.S. dollar terms due to the depreciation of the Brazilian real. Fuel isn't a large part of the consumer's daily expenses, nor does it make up a large portion of the inflation basket,' said Joe Bormann, Managing Director and Deputy Regional Group Head of Fitch's Latin America Corporate group.
More than one out of every four Brazilian corporate issuers rated by Fitch has a Negative Rating Outlook or is on Rating Watch Negative. Consumer and producer confidence have fallen to levels not seen since 2009. Inflation continues to hover at around 8% despite multiple increases in interest rates.
'In Mexico prices also remain highly regulated, and lower international oil prices will not positively impact Mexican corporates' cash flow,' said Bormann. 'Fitch expects upgrades and downgrades to be evenly balanced during 2015 in Mexico despite no positive cash flow benefit from lower oil prices globally.'
Fuel prices in Brazil are established by Petrobras, which has the only refineries in Brazil and supplies in excess of 95% of the country's liquid fuel demand. In Mexico, energy reform will result in the liberalization of fuel prices by 2018, which will then result in local prices closely mirroring international prices. Until then, prices remain heavily regulated.
