Emerging Markets Credit Risk Highlights

A selection of Moody’s latest comparative insights on global emerging market research. For a complete list of EM reports on Moodys.com click here.

Emerging Markets Outlook: No one-size-fits-all recovery in 2022

With over $90 trillion in outstanding debt, what forces will drive credit risk in emerging markets in 2022? Will credit conditions stabilize? Even as debt levels touch record highs, investors’ have shifted focus to new risks, such as inflation and supply chain disruptions. How are a multispeed recovery, high leverage, inflation, deteriorating financial conditions and other forces shaping credit risks? Which countries and sectors will lag, which will outperform? What factors set emerging markets apart?

For the full report on our outlook for all emerging markets across 107 countries and 1,800 sovereigns, corporates, and banks, click here.

Credit conditions are expected to stabilize in the new year, but high leverage and deteriorating financial conditions will increase credit risks for weaker emerging markets.
Ariane Ortiz-Bollin
Vice President, Senior Credit Officer
Moody's Investors Service


Emerging Markets – Global

Emerging markets debt accumulation was larger, faster and broader in the past 10 years than previous decades

(requires sign-in)

Despite stabilizing credit conditions overall, our outlooks for sovereigns in Sub-Saharan Africa and the Levant and North Africa are negative. In Sub-Saharan Africa, economic growth will accelerate only marginally in 2022, which will keep fiscal deficits, borrowing requirements and debt levels elevated. Without additional international support, these trends will likely weaken debt affordability and intensify liquidity and external pressure, particularly given the domestic banking systems’ limited capacity to provide finance.

The negative outlook for sovereigns in the Levant and North Africa reflects a subdued and uneven economic recovery across the region, entrenched governance challenges and elevated social pressures. Governments will struggle to maintain post-crisis fiscal discipline while confronting long-standing socioeconomic demands.

While financial conditions in emerging markets have improved relative to most of 2020 as measured by our proprietary EM Financial Conditions Indicator, they will remain tight compared with the long-term average, after a brief period of favorable conditions in April to July 2021. Many emerging market economies are raising domestic interest rates to contain inflation despite still-weak macroeconomic conditions.

Slowdown in real estate market contributes to the negative outlook on China’s regional and local governments

China Evergrande Group averted default on the final day of its 30 day grace period on November 10. Nonetheless, the financial troubles facing one of China’s largest property developers and the toll it is taking on the real estate sector will have repercussions on China’s local and regional governments (RLGs) as well.

Chinese RLGs are likely to suffer a drop in land sales revenue because of the growing challenges facing the real estate sector, while debt levels are likely to rise to maintain infrastructure investment in response to slowing real estate activity. Land sales are a significant revenue stream from China’s RLGs, accounting for roughly one-third in total revenue. Consequently, highly indebted provinces with higher land-sales reliance, such as Guizhou, will face fiscal pressure in a property market slowdown.

Aside from the revenue impact, the property slowdown is also likely to trigger a rise in RLG bond issuance in 2022, as falling land sales prompt the authorities to resort to debt-funded infrastructure investment to drive regional economic growth.

Despite the impact on RLGs, we expect that Evergrande credit distress will have limited direct impact on the sovereign, although the developer’s troubles are likely to trim economic growth, given the property sector’s large contribution to GDP, and the possibility that real estate may not recover as strongly as in previous cycles. Nonetheless, the authorities do have fiscal and monetary headroom to respond.

Similarly, our core view remains that the risks to the financial sector relating to Evergrande are manageable, even in the event of a default. The largest banks remain well-capitalized with strong loss absorption capacity, although some other financial institutions including trust companies are more directly exposed to losses arising from any potential default.

Despite the inflationary impact, rising commodity prices are providing a tailwind to many emerging markets in Latin America and the GCC

The emerging global economic recovery has driven a sharp increase in prices across a range of commodity markets, as pandemic-related restrictions were unwound and household spending recovered. In global oil markets, Brent crude exceeded $80/bbl a barrel in October, with the US Energy Information Administration now expecting that oil demand will marginally exceed pre-pandemic levels by the end of 2022. The rally has also extended to metals and agricultural products, with copper, corn and sugar all trading above 2019 levels this year.

The rising cost of raw materials has contributed to rising inflationary pressure across the globe, adding to the challenges facing policymakers as they navigate out of the pandemic, and prompting a slew of aggressive tightening cycles for several major emerging markets, including Russia and Turkey. However, for some emerging market sovereigns, higher commodity prices have been a boon, helping to offset the lingering effect of the pandemic as they grapple with lower vaccination rates and more protracted economic recoveries.

Among the major oil producers in the Gulf Cooperation Council, the sharp reversal in oil prices this year has provided a major tailwind to government budgets, which were under severe strain last year as Brent crude dipped below $30 a barrel at points, and averaged $42 a barrel for the year. In Oman, which alongside Bahrain has experienced the most significant erosion of its fiscal strength since the structural break in oil prices back in 2015, higher oil prices have significantly improved the outlook for government liquidity and external financing pressures, a key driver behind our decision to stabilize the outlook last month.

Meanwhile in Latin America, rising commodity prices supported by improving global demand throughout 2022 will buttress credit in the metals, mining and agricultural sectors, supporting the positive outlooks in these sectors. For example, in Chile, where copper accounts for around half of total exports, we expect the rally in copper prices will support corporate profits and encourage deleveraging in that sector, supported by the improving global economy and low inventories worldwide. However, rising demand for greater post-pandemic social spending has also raised the risk of greater taxation on the sector.