The creditworthiness of issuers in the non-financial corporate sector in Europe, the Middle East and Africa (EMEA) should stabilize during 2010 as a fragile and sluggish economic recovery takes hold, said Moody's Investors Service in its new Special Comment entitled “2010 Outlook for Corporates in EMEA” on Thursday. However, Moody's stresses that maintaining adequate liquidity levels will continue to be a challenge. Moody's said downgrades will continue to exceed upgrades during the first half of 2010, but says that downgrades should ease gradually. “Indeed, parity in the downgrade-to-upgrade ratio will probably be reached later in 2010, barring unforeseen reversals,” said Jean-Michel Carayon, senior vice president in Moody's Corporate Finance Group. Key determinants of the recovery in all sectors will be the form and timing of governments' unwinding of stimulus policies as well as the expected challenges in sovereign risk. In its review of the corporate speculative-grade segment, Moody's predicts that the European default rate will decline to below 4 percent by the end of 2010. “Although industry outlooks may stabilize, Moody's expects a number of high-yield issuers to experience negative rating actions if current lower levels of cash flow do not improve in 2010,” said Chetan Modi, vice president/senior credit officer in Moody's EMEA Corporate Finance Group. “The corporate sectors in the emerging markets of the EMEA region - the Middle East, the CIS and Central and Eastern Europe - will recover slowly but will lag the recovery that we anticipate elsewhere,” said Michael West, group managing director of Moody's EMEA Corporate Finance Group. Moody's said auto manufacturers have a stable outlook because of modest growth trends that are taking hold across the sector globally, although the EMEA sector is more weakly positioned and faces weak demand. Auto suppliers retain a negative outlook as they continue to be susceptible to low demand and pricing pressure. The European Retail sector has a negative outlook, although a rise in consumer spending in line with the expected return to economic growth could lead to a stabilization of the negative outlook during 2010. The telecoms sector continues to have a stable outlook as solid balance sheets and demand have continued to benefit recession-resistant telcos and cable operators. The building materials sector has a negative outlook based on continued depressed demand, although volumes could improve in H2 2010. The stable outlook for utilities is based on their continued ability to manage costs and capex despite a recession-led drop in demand. The outlook on the oil & gas sector was recently revised to stable from negative based on the expectation that profitability and demand will recover in 2010. The media sector has a stable outlook given that advertising markets are predicted to recover, albeit not evenly, from the sharp downturn in 2009. However, the steel, chemicals and pharmaceutical sectors have negative outlook. Steel low utilization rates and volatile prices imply that a recovery is only likely as of mid- to late 2010. The chemicals sector has a negative outlook given that profitability will be pressured by the expected rise in raw material prices ahead of a rise in demand. The pharmaceutical sector retains a negative outlook as patent expires, limited pipelines and competition from generics represent a greater threat than the economic downturn.
