Next year will present a challenging backdrop for emerging markets (EMs).
Our negative outlook on credit conditions for EMs will permeate to sovereigns,
companies and banks. Although higher-rated EM issuers have the credit
fundamentals to weather the turn in the cycle, weaker entities with ratings
of B or below are vulnerable given their limited financing options and
reduced capacity to absorb shocks.
In the external sovereign credit space, higher-rated EM sovereigns will
fare better, while risks for lower-rated sovereigns are rising. Relatively
deep domestic financial markets and proactive monetary policies will support
the resilience of most EM sovereigns with ratings of Ba or higher. Lower-rated
sovereigns in particular will experience credit stress amid higher borrowing
costs and diminished market access. We also don’t expect to see material
changes in the level of support that sovereigns provide to government-related
issuers.
In terms of EM local macro dynamics, we expect EM economic growth to exceed that
of advanced economies in 2023, with the growth rate difference between the two
groups returning to historical rates. However, China will account for almost all
of this better performance, as we still forecast lower growth for most EMs compared
with 2022. EM inflation will peak in 2022 and then fall consistently in 2023 as
monetary policy tightening slows demand and supply-chain disruptions normalize.
Nevertheless, a transition to lower inflation rates will take time.
In EM corporate credit, we see trends differing across the landscape. Exposure to
sovereign risk will be a credit constraint for many EM companies. EBITDA performance
will be nuanced in specific sectors but higher borrowing costs and inflation will
lower profit growth and hurt demand as consumers\' purchasing power weakens.
Regionally, Latin American companies are least exposed to deteriorating credit
conditions, whereas negative credit pressure in China\'s property sector will be high,
as we expect that a large proportion of rated Chinese property developers will find
it very difficult to refinance and will be at high risk of default.
In the EM banking universe, we expect the operating environment will deteriorate
but interest margin gains will temper negative credit impact. The deterioration
in EM credit conditions will have negative effects on aspects of the operating
environment for EM banks, with problem loans and provisioning charges rising,
and higher inflation increasing operating expenses. Nevertheless, we have a stable
outlook on most EM banking systems, reflecting our expectation that they can absorb
these challenges.
To read our in-depth views across emerging market sectors for 2023, please follow the link to the full report below.
November 2022
Emerging markets – Global: 2023 Outlook - Negative credit conditions leave weaker debt issuers exposed
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podcasts
16th November 2022
Negative global credit conditions will weigh on weaker emerging market debt issuers in 2023
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Long-time emerging markets investor Mark Mobius speaks with Atsi Sheth of Moody’s about the risks and opportunities in the current macroeconomic environment, effects of the strong dollar, and the outlook for cryptocurrencies as an asset class. This interview took place on the sidelines of Moody’s recent South Africa Risk Summit in Johannesburg, and also touches on Dr. Mobius’s views on investing in Africa and how he thinks increased digitalization of economies will play a large role in improving governance frameworks across the continent.
podcasts
November 2022
Podcast: Taking the temperature of emerging markets amid economic tumult
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A combination of tight financial conditions in both developed and emerging markets, a strengthening US dollar, elevated credit spreads and outflows from EM funds have driven EM corporate issuance volumes down. EM corporate issuance has dropped by 61% year-on-year for the first three quarters of the year.
Lower-rated credits – which have seen the largest increases in spreads – are particularly exposed to refinancing risks in the current environment.
Chinese real estate issuers represent a third of the B1-or-lower-rated international bonds maturing between Q4 2022 and Q4 2024, followed by Turkish banks which represent 22%. The rest we have segmented as issuers with weak stand-alone credit quality and as other issuers domiciled in low-rated sovereigns (see Exhibit below).
For Chinese real estate developers, we see significant challenges and expect that a large proportion of the rated universe will find it very difficult to refinance and are at high risk of default. On the other hand, and despite a widening of credit spreads for Turkish banks, we are less concerned and anticipate that most banks will be able to refinance in the international loan market if required.
To read more about which issuers are at risk of default, which will be resilient to further liquidity tightening and understand how parent support may help mitigate some risks, access our full report below, or tune in to our Emerging Markets Decoded podcast.
October 2022
Cross Sector – Emerging Markets: EM corporates face high refinancing risk as tight financial conditions persist
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podcasts
October 2022
Podcast: Emerging market companies face high refinancing risk as tight financial conditions persist
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