SA risk high in Moody’s survey

EMERGING MARKETS: BROADER, 12-MONTH OUTLOOK BRIGHTENS While most emerging market participants see a broad recovery in the next 12 months, the optimism does not apply to South Africa and Turkey.

South Africa is the emerging market that will experience the greatest deterioration in credit conditions, a poll says.

South Africa (42%) and Turkey (40%) are the likeliest emerging markets that will experience the greatest deterioration in credit conditions in the next year, a Moody’s poll of 250 market participants says.

But broader emerging market conditions are expected to brighten considerably, benefiting from more stable macroeconomic conditions, it says.

Bad omen

The negative view of South Africa’s prospects may not auger well, with Moody’s expected to issue a rating opinion of the country’s sovereign debt within days. Fitch and Standard & Poor’s ratings agencies have already downgraded South Africa’s external debt to “junk”.

Moody’s forecasts real GDP growth of 5% and 5.1% for G-20 emerging markets in 2017 and 2018, which would mark an acceleration from the 4.4% recorded in 2016.

All major EM economies will post positive economic expansion on average this year and next, with a majority likely to exhibit a better growth performance than in recent years.

The biggest risks are from a China slowdown and elevated corporate debt levels, the survey issued yesterday says.

Moody’s surveyed delegates at its inaugural Emerging Markets Summit in London on May 16. There, 250 market participants and Moody’s global analysts debated the credit outlook for sovereigns, financial institutions and companies in developing markets.

The report, “Cross-Sector – Emerging Markets: Heard from the Market: Emerging Market Credit Profiles Stabilise, but Recovery Prospects Vary”, is an update to the markets and does not constitute a rating action.

“Almost all emerging market economies are set for positive economic growth in 2017 and 2018,” said Rahul Ghosh, a Moody’s vicepresident, senior credit officer and co-author of the report.

“Steadying growth, coupled with an adjustment in external deficits in many economies and a further gradual rise in commodity prices, should support emerging market capital inflows and credit conditions in the next year.”

The report says the general view towards EM credit is one of cautious optimism, but “a high share of emerging market sovereigns carry negative ratings outlooks, which reflects their widely varying ability to embark on sustainable recoveries”.

“Fundamental differences in economic structures, external vulnerabilities, fiscal positions and political systems will contribute to differences across EM countries and influence the ability of developing markets to embark on sustainable recoveries,” it says.

China worries

Moody’s polling at the EM summit revealed the largest risks to EM credit in the next 12 months are a sharper slowdown in China and renewed commodity price pressure (39%), “followed by elevated EM corporate sector and household sector leverage (27%)”.

Only 16% of those polled saw rising US protectionism as the single greatest challenge.