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.

FDI flows to emerging markets could face structural headwinds, weighing on growth potential

Not surprisingly, the pandemic triggered a decline in FDI flows into emerging markets in 2020. However, even prior to the pandemic, aggregate FDI flows into emerging markets as a share of GDP had almost halved in the prior decade.

Why have FDI inflows declined so significantly? One of the most notable trends has been the decline on FDI returns in emerging markets. Before the global financial crisis, FDI in major EMs offered higher rates of return compared to developed markets, helping compensate investors for the additional risks associated with EM investments, such as more challenging regulatory and business environments and higher political risks. However, since 2009, returns on FDI across EMs have declined significantly, while returns on FDI in developed markets have remained relatively stable.

Weaker FDI inflows could weigh on long-term growth potential for emerging markets, given that FDI has been a key source of knowledge and technology transfer, supporting total factor productivity growth. While some countries with high domestic savings rates may be better placed to manage the impact of a decline in FDI on fixed investment, those with lower domestic savings and weaker capital markets access, such as smaller countries in Latin America and Africa, are more likely to be affected as a result of lower FDI flows.

Moreover, a protracted and uneven recovery across emerging markets, coupled with deglobalisation and growing interest in shortening supply chains to address some of the vulnerabilities laid bare by the trade tensions between the US and China, and more recently the pandemic, are among the significant headwinds that may prevent a reversal of this decline.

Omicron outbreak could exacerbate existing supply chain and inflation woes for emerging markets

The emergence of the Omicron coronavirus variant poses new risks to the global economic growth and inflation outlook, as concerns mount about the variant's health risks and several countries have imposed new travel restrictions in recent days. However, the risks to emerging markets are particularly acute: should the new variant lead to another rising wave of COVID-19 infections, the hardest-hit economies will be those with lower vaccination rates, higher dependence on tourism and lower capacity to offer additional fiscal and monetary policy support to offset the growth impact of the resurgence in infections.


Macroeconomics – Global

Vaccination rates vary across emerging markets but remain on average lower than developed markets

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Amongst emerging market countries, the economic impact from the outbreak will not be homogenous, and will depend on a mix of government restrictions, public comfort with social interactions, and the capacity of governments and central banks to provide additional policy support to the private sector, if needed.

Even prior to the outbreak of the latest coronavirus variant, emerging markets were already coping with more rapid than anticipated increases in inflation and persistent supply chains disruptions. High food and energy prices, which account for a large share of emerging market’s disposable income, has led to rapid increases in headline inflation in major emerging markets including Turkey, Brazil, Mexico and Russia, increasing the risk of government mandated price controls, which could weaken corporate profitability.

The latest outbreak could also have implications for the easing of supply chain bottlenecks. Over recent months, high-frequency alternative trade indexes, which reflected base effects earlier in the year, suggested an ongoing but uneven recovery across emerging markets (EMs).

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

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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.