Emerging Markets Credit Risk Highlights

Moody’s comparative insights on global emerging markets

Uneven economic recovery and its credit impact in emerging markets

The most severe phase of the pandemic-generated crisis appears to be behind us thanks to rapid and significant liquidity and funding support, including financial assistance from multilaterals. But the road to recovery will be uneven and bumpy, with the speed of vaccination roll-outs, and the rise of new covid-19 variants, as highlighted in the graphics below, are playing a key role in differing regional fortunes.

As markets have rebounded, prices for goods and services have rocketed up. However, Moody’s believes we are close to the peak. Inflation has surprised to the upside in major advanced and emerging economies, reflecting a combination of base effects, swift demand rebounds and persistent supply chain challenges. As the below report outlines, enduring supply issues – with commodities, industrial inputs and labor – are likely to keep inflation elevated through 2021.

To put the ongoing inflation scenario into perspective, some of our leading analysts gathered to opine on it for our benchmark podcast series, Emerging Markets Decoded, in which they outline the potential financial stability risks for emerging markets.

Listen here:

ESG risks increasingly impact credit, with diverging mitigating strategies

In addition to rising credit pressures, ESG considerations have become more relevant for emerging Markets than ever. Current research shows that an overwhelming majority of public sector rating actions were driven by an ESG consideration, mostly E, but social and governance considerations were also relevant, as is highlighted in the following report:

On the topic of environmental factors, physical climate risk is broadly credit negative for sovereigns, particularly for emerging markets with climate-dependent economic structures and low-quality infrastructure and healthcare systems. This infographic gives an overview of Moody’s framework for assessing physical risk.

However, where it comes to environmental factors, not all emerging market regions are effected equally. In fact Moody's ESG credit impact scores for Latin American and Caribbean countries highlight comparatively lower exposures to environmental risks and generally higher income levels, increasing the region's resilience to ESG risks.

The primary driver of physical climate risk is of course the volume of carbon emissions produced globally. Many of the world’s leading economies have set ambitious net zero targets but, as this podcast outlines, major nations such as China face a series of hurdles and credit implications to meet their carbon goals.

Opportunities and risks of digital currencies for emerging markets

In the wake of the rise and threat of digital currencies, such as Bitcoin and Libra, central banks across the world have launched consultations and pilot projects into how to create a digital form of cash, namely a central bank digital currency. As the following report states, the consequences for banks could be profound.

As a country-specific example, the People’s Bank of China (PBoC) is testing a digital version of the renminbi, known as e-CNY, which, if adopted on a widespread basis, has the potential to shake up the country's e-payments industry. This, as the following report outlines, will have mixed credit implications for banks and technology companies.

However, new technologies in the banking sphere are also creating opportunities in emerging markets. With mobile and digital technology bringing basic financial services to the unbanked and data analytics and artificial intelligence providing credit to those without credit history, technology is driving financial inclusion.