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No Sign of Global Recession

No Sign of Global RecessionNo Sign of Global Recession

The prolonged decline in oil prices and weaker expansion in Chinese economy have dimmed growth prospects of several economies, but it does not signal a threat of global recession, Moody's Investors Service said Tuesday.

"Risks to global growth have increased, but despite the recent market volatility, we don't believe that the world's advanced economies will enter recession," said Moody's Senior Vice-President Elena Duggar.

According to the rating agency, the continuous decline in crude oil prices and sluggish growth in China have prompted a reappraisal of global economic growth prospects, causing risk aversion to rise and financial market conditions to tighten.

"While the current environment will curb growth in specific regions, it does not presage a global recession," Moody's said in a statement.

Moody's, in February, took negative rating action for a number of corporates, banks and sovereigns whose revenues, loan portfolio performance and tax receipts are heavily dependent on the production of oil and other commodities.

"We believe that the positive impact of lower commodity prices on global growth helps mitigate the negative effect from the financial market turbulence," it said.

Moody's expects growth in G-20 advanced countries to be stable at 1.8% for 2016 and 2% for 2017.

"... The positive effect of lower commodity prices to a large extent will mitigate negative factors such as weaker consumer and business confidence levels caused by increased financial market volatility, and deteriorating trade linkages with emerging markets," it said in a report.

Moody's believes that the current macro-credit environment is similar to conditions in 1987 or 1998 when credit problems within certain sectors of the global economy were very severe, but the rest experienced only a modest slowdown in economic activity.

Downgrades Vedanta

Downgrading Vedanta Resources corporate family rating, Moody's Investor Service Monday said the metals and mining conglomerate faces a refinancing risk.

Vedanta Resources plc is a global diversified metals and mining company headquartered in London, UK. It is the largest mining and non-ferrous metals company in India and has mining operations in Australia and Zambia and oil and gas operations in three countries.

The ratings agency has also downgraded the firm's senior unsecured rating to 'Caa1' from 'B1' and the outlook on all ratings is negative, it said in a statement.

"Downgrade of Vedanta's ratings is driven by low commodity price environment that will keep earnings improvement distant and slower correction in leverage metrics than initially anticipated," Moody's Vice President and Senior Analyst Kaustubh Chaubal said.

Rating actions also incorporate the "refinancing risk that the company faces, in particular, in relation to its debt maturities during the financial year ending March 2017 (2016-17)", he added.

The rating actions reflect Moody's view that there has been a fundamental downward shift in the mining sector with the downturn being deeper and the recovery longer than Moody's had previously expected, he said.

This is resulting in increased credit risk and weaker credit metrics for Vedanta, as well as global mining sector. Consequently, ratings need to be recalibrated to reflect the companies' expected performance over a more protracted challenging operating environment, Chaubal added.

At the same time, the reduction in taxes on production of oil to 20% ad valorem ($6-7 per barrel at current prices) from Rs 4,500 ($66.86) per ton will lower the cash cost of production by some $2-3 a barrel.

However, the decline in oil prices has been so sharp that the reduction in taxes on production will have a muted impact on Vedanta's earnings, he said.

Vedanta's B2 CFR also reflects refinancing risks associated with its $2.67 billion debt maturities in the next financial year.

Financialtribune.com