Global credit quality continued to improve in the fourth quarter of 2005, with credit rating upgrades exceeding downgrades, albeit at a slower pace than in previous quarters, Moody’s Investors Service said.

Globally, the ratio of upgrades to downgrades was 1.15 in the fourth quarter, down from 1.62 for the third quarter. For the whole year 2005, the upgrade-downgrade ratio was 1.73, far above the historical annual average of 0.67, Moody’s noted.

Average credit quality in North America, however, actually declined, as the upgrade-to-downgrade ratio dipped below 0.78 during the fourth quarter, as there were more downgrades than upgrades, the rating agency said. In other regions, however, credit quality improvements continued unabated, with an upgrade-to-downgrade ratio of 1.38 in Europe, the Middle East and Africa, 1.78 in Asia-Pacific, and 5.60 in Latin America, according to Moody’s.

“The upward trend in credit quality has already begun to moderate and should continue to do so in the coming months, judging from fourth quarter rating actions and the distribution of ratings on review and rating outlooks,” says Praveen Varma, the author of the reports and a Moody’s vice president.

“The distribution of issuers on review for upgrade or downgrade that shows strong regional variation, but overall, there are more issuers on review for downgrade or with negative outlooks than on review for upgrade or with positive outlooks,” Varma says.

In North America, and EMEA regions where majority of the issuers are located, there are more issuers on review for downgrade than on review for upgrade, indicating credit quality will most likely deteriorate, explains Varma, while both the Asia-Pacific and Latin America have more issuers on review for upgrade than downgrade.

Rating actions last quarter reveal that particular industries are facing a challenging credit environment, with downgrades concentrated in the automotive, forest products and telecom sectors. With the automotive industry facing a deteriorating business environment, it is possible that it will continue to see further credit stress. Benefiting from a disproportionately large share of upgrades, in contrast, were banking, energy, finance, packaging, and mining & metals industries.

Moody’s also reports that credit quality improvement was concentrated among speculative-grade rated companies, with roughly twice as many upgrades as downgrades in the fourth quarter. In contrast, there were more downgrades than upgrades among investment-grade companies.