We expect demand for Shariah-compliant instruments to continue to rise in 2023, supported by strong economic growth amid robust oil prices and ambitious development agendas in core Islamic markets.

African banks are more exposed to governance and environmental risks than their global peers. Relative governance weaknesses have led to operational and loan losses, while risk exposure to climate change and carbon transition is intense.

The exit from zero-tolerance coronavirus restrictions in December 2022 and shift in government focus to growth prompted us to raise our forecast for inflation-adjusted real GDP growth in 2023 and 2024. 

Banks in Southeast Asia have made significant progress on their digital transformation journey, and incumbents that are willing to invest in technology are well placed to compete with fintech’s.

The measures broaden developers' funding access, which will help many better address near-term operating and debt repayment needs.

Ukraine invasion provides gains for some CIS banks. While banks in Ukraine and Belarus suffered from the Russian invasion of Ukraine last year, banks in other parts of the Commonwealth of Independent States (CIS) reaped some unexpected gains.

We expect both Brazil and Mexico’s central banks to remain vigilant about inflation resurgence risks, as well as shifts in US policy direction. Brazil started hiking rates early in 2021 and Mexico followed suit, but from a higher starting point.

Recent improvement in financing conditions is positive for many emerging market (EM) issuers, with inflation, yields and spreads all somewhat lower since November 2022. Nevertheless, hopes for rate cuts in the US in the near term are likely misplaced, while China's rebound will not provide the same broad-based benefits as in previous cycles. 

Drawn-out negotiations to restructure government debt in Zambia, Ethiopia and Suriname highlight the inherent difficulties in reaching an agreement among a diverse creditor base, a risk we flagged two years ago.

Large incumbent banks across emerging markets (EMs) are making substantial operational changes to contend with new digital market entrants that are fundamentally altering the dynamics of product development, marketing, customer retention and growth.

Most rated issuers are resilient to impact of earthquakes. Economic impact is likely to be moderate; governments strong fiscal position mitigates elevated cost of relief and reconstruction.

Banks’ asset risk pressures to persist beyond 2023. Brazilian households' disposable income is showing the strains of elevated living and debt-service costs and driving up retail banks' loan-delinquency ratios.

Strong, though moderating, economic growth rates in Asia-Pacific (APAC) will support the region's credit conditions in 2023. However, APAC's growth trajectory will partly hinge on the recovery in China (A1 stable). Peaking inflation globally will provide space for monetary tightening cycles to slow, but financial conditions will remain challenging for the weakest-rated issuers.

Rising geopolitical tensions in Asia-Pacific (APAC) against the backdrop of increased competition between China and the US and its allies in the region will create "fault lines" that could carry long-lasting credit effects.

Our outlook for sovereign creditworthiness in Asia-Pacific (APAC) for 2023 is stable overall, contrasting with our negative outlook for sovereigns globally. Debt sustainability and financial stability are relatively well anchored in the region, with contained government liquidity risks, broadly stable debt dynamics and generally sound external positions.

Our outlook for credit conditions for Chinese regional and local governments (RLGs) in 2023 is negative, given our expectation of ongoing weakness in land sales revenue, persistently high fiscal deficits, and continued growth in direct debt and contingent liabilities.

FX risk is acute for some EM banking systems. A material exposure to currency fluctuation could expose emerging markets (EM) banks in these countries to additional risks to asset quality, liquidity and capital.

Economies with significant direct trade exposure to China would incur the biggest negative effects, with slower growth in China likely to depress confidence and investment in the region.

The Medium Term Budget Policy Statement announced better-than-expected revenue outcomes, which translate to improved fiscal deficits and lower-than-expected debt levels in the coming years, a credit positive.

On 27 October, the International Monetary Fund (IMF) reached a Staff-Level Agreement on a 46-month, $3 billion Extended Fund Facility Arrangement (EFF) with the government of Egypt. The EFF, which we expect will be finalized before year end, is credit positive because it is expected to unlock additional funding from multilateral and regional partners.

Tight financial conditions, high credit spreads and outflows from EMs will make it difficult for many lower-rated issuers to refinance maturing international bonds.

Our baseline scenario does not incorporate major post-election disruptions for Brazil, but any persistent uncertainty over policy direction will hinder the country's economic and financial prospects.

The countries of the Association of Southeast Asian Nations (ASEAN) have varied approaches toward reducing carbon emissions but face a number of common challenges such as heightened exposure to physical climate risk and carbon transition costs from their fossil fuel dependence and reliance on energy-intensive manufacturing. 

On 22 September, El Salvador (Caa3 negative) finalized its debt buyback operation of two bonds maturing in 2023 and 2025 for $360 million, which we consider a distressed exchange and hence a default under our definition .

Over recent months, dollar appreciation on the back of tightening by the US Federal Reserve (Fed) and higher commodity prices have resulted in most currencies across Asia Pacific (APAC) and beyond coming under significant depreciation pressure. 

Rating actions for non-IG EM sovereigns between March and early September 2022 primarily reflect the change in credit conditions stemming from Russia’s invasion of Ukraine, with Emerging Europe including Eurasia seeing the bulk of negative actions. In terms of ESG-related drivers of rating actions, governance considerations were most pertinent over this period

Recent currency depreciation has been much less pronounced than the declines seen during the taper tantrum in 2013, and the sell-off after the start of the coronavirus pandemic in late 2019. However, if persistent, currency depreciation would present a range of credit pressures

Rising state involvement in private equity market aids the development of public and strategic sectors in China. However, it brings about credit risks to both state and private participants.

We anticipate that emerging markets' growth will buck the global trend and accelerate to 3.8% in 2023, from 3.3% in 2022. However, this will be driven almost entirely by China – most other EMs will still see a reduction in growth. 

Tighter credit conditions will result in both lower financing activity and lower diversity in the financing of Asian emerging market infrastructure in the next 12-18 months, which will have an outsized impact on emerging markets (EM), especially outside of China.

We expect global sukuk issuance to slide further in 2022 after a large decline in 2021, which followed several years of consecutive growth.

In this year's uncertain environment, the likelihood of sporadic risk-off episodes pushing capital flows from EMs to safe havens is high.

The deal will aid government efforts to turn around the economy, which lacks the foreign exchange resources to import essential items such as fuel, fertilisers and food, or to address social challenges.

The disbursements will help offset the government's outlays for its post-pandemic countercyclical development expenditure program (CDEP) that aids vulnerable sectors of the society, support longer-term economic reforms and ease pressure on its balance of payments position. 

The IMF financing and the additional support from bilateral partners that it will catalyse will ease pressure on Pakistan's dwindling foreign exchange reserves, which currently cover less than two months of imports.

Some sovereigns have overcome constraints related to low incomes through institutional, social and economic reforms which have bolstered their credit strength.

While higher-rated EMs are resilient, some lower-rated frontier markets are facing rising liquidity risks due to challenging market conditions, raising debt sustainability risks.

The president's announced intention to buy back two bonds maturing in 2023 and 2025 at market prices, below par, would likely constitute a distressed exchange.

Currency pegs and fuel price caps will keep GCC inflation below levels reported elsewhere, while robust oil revenues will allow governments to sustain fuel subsidies and contain social risks

Food security has become a major concern for governments in Asia-Pacific as the Russia Ukraine military conflict continues to disrupt the supply and raise the cost of agricultural products.

Forced currency re-denomination is not permitted under the bond’s indenture and results in a diminished financial obligation.

An upcoming maturity wall and a deterioration in global financial conditions triggered by the Russia-Ukraine conflict will intensify rollover risks for many African sovereigns over the next decade.

Policy rate hikes to curb inflation typically lead to improvements in banks' margins. Yet a more rapid acceleration of inflation would negatively impact asset quality, erasing margin gains.

The Russian invasion has severely disrupted the economy and public finances. International support is forthcoming but debt will likely prove unsustainable, raising risks of a restructuring.

While the new measures will accelerate deficit reduction, the additional tax burden will intensify policy uncertainty for investors and businesses and further weaken bank profitability, a credit negative.

In our downside scenario about 30% of the emerging market companies we rate are at risk of credit quality erosion through commodity price shocks and financial and economic disruption.

We expect the greatest risks for sovereigns with weaker macroeconomic frameworks, particularly where cryptocurrencies can be used to evade capital controls, weakening policy effectiveness.

Some emerging market banks are better placed to deal with the latest crisis than others.

While the credit impact of the pandemic on emerging market sovereign credit was uniformly negative, this shock will result in a range of outcomes which hinder, but do not derail, the trajectory of the recovery from the pandemic

In this report, we summarize key risks for the sovereign credit profiles of some emerging markets (EM) based on meetings with investors in Washington DC on the sidelines of the IMF-World Bank spring meetings.

South Africa's government has faced major challenges over the past couple of years to balance support for its economy, especially during the coronavirus pandemic, with fiscal sustainability.

In April, a delegation of Moody’s analysts attended the IMF Spring Meetings in Washington DC and met with sovereign issuers from across the globe, as well as public and private-sector market participants. In this report are some of the key takeaways from those meetings.

Healthy capital positions and access to liquidity mitigate the deterioration in asset quality and performance we expect post pandemic.

The stability of key funding sources and credit stimulus limit the impact of key transmission channels from the conflict. Lira stability will be key to contain any further rise in inflation.

Crowding-in private-sector investment will be crucial for emerging markets to meet their Sustainable Development Goals. Risk mitigation strategies are positive but the market seeks scale.

The ripple effects of the Russia-Ukraine conflict are spreading globally at a time when most sovereigns are still dealing with economic and fiscal scarring from the pandemic. The most exposed sovereigns are Poland, the Baltics and Moldova given their political risk exposure, as well as Commonwealth of Independent State sovereigns that face significantly lower growth and higher external vulnerability.

Emerging markets are increasingly considering implementing central bank digital currencies (CBDCs) as an alternative to cryptocurrencies and crypto assets, which are volatile and can threaten financial stability. However, even if still-nascent implementation efforts accelerate over the next year, it will take years before CBDCs become a key feature of the global financial architecture.

The sharp deterioration in Russia's economy represents an acute shock for the region's external vulnerability risk, growth outlook and prospects for fiscal consolidation.

While still far from wide adoption, particularly given limitations to technical infrastructure worldwide, a credible, widely accessible and reliable CBDC could support economic growth.

China’s ambitious growth target amid rising economic stress and external uncertainty to push up leverage, debt ratio; credit impact relies on growth outturn, effectiveness of implementation.

The disruption of food supplies from Russia and Ukraine is likely to further compound inflationary pressures in global food prices.

The invasion of Ukraine has led to a steady deterioration in the ability and willingness of all three governments to repay debt, and will have long-term economic and fiscal consequences.

Sharply higher risk premia indicate that external market access on affordable terms is effectively interrupted and, if persistent, would increase liquidity risks.

Economic and fiscal metrics recovered and leverage increased, with outstanding RLG bonds exceeding RMB30 trillion for the first time.

Rating actions in 2021 through 24 February 2022 were more balanced between negative and positive actions compared to 2020, although the pandemic continued to place downward pressure on non-investment-grade sovereign ratings.

Ban on servicing new foreign-currency debt undermines institutional strength, a credit negative

The risk that heightened tensions may culminate in a further military conflict have risen. We answer questions regarding the credit implications in a scenario in which tensions escalate.

Should the Bitcoin bond issuance fail, El Salvador would have to rely solely on multilateral financing and unconventional policy measures to raise funds to repay the 2023 bond.

Dollarization is highest for banks in Latin America, emerging Europe and CIS.

Program targets under the potential new agreement with the IMF will likely fail and the program itself is unlikely to reverse the sovereign's debt restructuring needs.

Quality of institutions and the capacity to adjust will determine the credit impact of carbon transition for hydrocarbon-reliant sovereigns.

Regional and local governments (RLGs) in South Africa, India, Russia and Mexico are likely to accelerate their capital expenditure (capex) after cuts triggered by the pandemic. However, infrastructure gaps have widened and progress will likely remain stalled absent greater external support

In the majority of emerging markets, banks will continue to benefit from the expansion of working-age populations. Yet the demographics of those countries pose their own risks for banks.

Pent-up demand for tourism offers good prospects for Latin America and the Caribbean's travel-related sectors in 2022 and beyond. Despite a lingering uneven recovery and the unknown implications of the Omicron variant, rekindled demand fortravel to the broader region will persist through 2022, with infection rates in the region declining through November 2021 and vaccinations accelerating in large markets.

FDI inflows into emerging markets have fallen amid declining returns and weaker growth. With structural headwinds likely to prevent a reversal of this trend, growth potential may be weakened.

Environmental damage to Brazil's biomes will have a substantial impact on Brazilian companies in coming years, rippling across different sectors and the wider economy.