EM issuers take hit from virus as global recession deepens

G20 debt freeze won’t fix eligible sovereigns’ liquidity pressures: Moody’s

LONDON, May 21: Moody’s Investors Service has launched the fourth edition of its Emerging Markets Chartbook, with its proprietary indicators and data pointing to a challenging year ahead for EM sovereigns, sub-sovereigns, corporates and financial institutions globally.

“The global recession is deepening as coronavirus-related restrictions exact a high economic cost, and we now expect real GDP to contract by 1.0% for G-20 emerging market economies in 2020,” says Denis Perevezentsev, a Moody’s Vice President and Senior Credit Officer.

“We have already seen a large number of downgrades among highyield corporates in recent months, reflecting the economic and financial upheaval the coronavirus has inflicted upon emerging markets,” adds Perevezentsev.

Moody’s rates 106 emerging market sovereigns — a figure which has seen consistent growth from just 63 in 2004 — and over 1,600 non-sovereign issuers from 70 EM countries.

Asia Pacific issuers account for 35% of all rated EM non-sovereign issuers, with 60% from China. A total 62% of the region’s issuers have investment-grade ratings, and 69% have stable outlooks – down from 83% in September 2019. Negative bias is particularly high in India and Vietnam, where respectively 63% and 68% of ratings carried a negative outlook or were under review for downgrade as of 30 April 2020.

Asia Pacific has led growth in EM rated non-financial corporates, and now accounts for 49% of this category, and China for 35%.

The region’s non-financial corporates have also driven EM Eurobond market activity, accounting for 64% of the $90 billion issued between January and April 2020.

Emerging Europe accounts for 19% of all rated EM non-sovereign issuers and Africa and the Middle East for 15%. Negative bias – the share of ratings with a negative outlook or under review for downgrade – is particularly high among Africa and Middle East issuers, at 50%, and more moderate at 19% for Emerging Europe.

EMEA also accounts for 25% of rated EM non-financial corporates, with a large portion concentrated in Russia and South Africa. 57% of rated non-financial corporates in Africa and the Middle East had a negative bias as of 30 April 2020, driven by sovereign pressures in South Africa and Oman, compared to 22% in Emerging Europe.

Furthermore, 65% of non-financial corporates in Emerging Europe and 41% in Africa and the Middle East have stable outlooks.

Meanwhile, the G-20 debt suspension initiative is unlikely to ease the significant credit challenges that the coronavirus pandemic has amplified in some frontier market sovereigns, particularly in Africa, Moody’s Investors Service said in a report to

day.

By lowering debt-service payments at a time when government resources are limited and access to market financing is considerably constrained, the initiative will help to ease short-term liquidity pressures.

However, debt-service relief won’t have a significant impact on medium-term debt trends that have worsened during the crisis. Bilateral relief would only cover a fraction of the increased external funding gap

resulting from the shock.

“While debt-service relief will allow some governments to reallocate scarce resources toward health and social spending, it will not have a significant impact on weaker medium-term debt trends,” said Lucie Villa, a Moody’s Vice President Senior Credit Officer and the report’s co-author.

“The coronavirus shock will lead to sharply lower growth this year, wider budget deficits and higher debt burdens for at least the next few

years, as well as higher borrowing costs, at least for debt contracted on commercial terms.”

“The prospect of significantly diminished revenue constraining debtservice capacity poses longer-term solvency challenges.”

The coronavirus shock and the authorities’ associated policy response have opened large fiscal and external imbalances that will take time to unwind. Low-income sovereigns entering the crisis with elevated debt burdens or exposure to foreign-currency

risk are most vulnerable.

Moody’s estimates that the suspension of debt-service payments could reduce the funding needs of eligible Moody’s-rated sovereigns by about $10 billion over the next eight months.

This would only cover a fraction of the external gap, leaving an outstanding shortage of around $40 billion. New official sector disbursements are expected to help fill the gap, including emergency financing from the IMF.