Macroscope | Emerging markets hit by downgrades

The credit rating agencies call it "migration risk" - the likelihood of a country or company being stripped of its investment grade status and being downgraded to speculative grade, or junk. This results in an increase in the issuer's cost of capital and a more challenging funding environment.

Following the 2008-09 global financial crisis, advanced economies bore the brunt of rating downgrades - particularly in 2011 and 2012, when the crisis in the euro zone escalated dramatically and southern European countries' ratings were cut several notches and even "junked" in the case of Greece and Portugal - while the creditworthiness of emerging markets improved due to stronger fundamentals and significantly less leveraged financial sectors.

Indeed, so stark was the contrast between the slew of downgrades in advanced economies and the raft of upgrades in developing ones that some institutional investors even claimed that the sovereign debt crisis plaguing Western economies had turned asset allocation on its head.

The very term "emerging market" had, according to some commentators, become obsolete.

What a difference a few years can make. On Monday, Russia - an economy which in 2011 was still growing at a respectable 4.5 per cent clip and which was perceived to be one of the most resilient emerging markets because of its large foreign exchange reserves and very low public debt burden - was downgraded to junk by Standard & Poor's.

This is the first time that a major emerging market economy has been stripped of its investment grade status and the clearest indication yet of the reversal in the trend of improving creditworthiness in the developing world.

According to JP Morgan, last year was the second year in a row in which the number of emerging market downgrades exceeded the number of upgrades. There are now more developing economies with negative ratings outlooks than there are with positive ones.