S&P Global Ratings recently published: “Emerging Markets Risk Monitor: Growth Weakens, Uncertainty Intensifies”. In this report, S&P Global Ratings delves into the key risks and macroeconomic conditions for key emerging-market economies. We also present a multidimensional risk analysis for the key emerging economies around the globe. Our emerging-markets risk profile aims to measure a country’s risk exposure to weakening external and/or internal conditions by assessing the relative strength of its sovereign fundamentals, its financial system, and the corporate sector.
Below are the key takeaways from our report:
- Overall: Advanced economies’ monetary easing is not materially improving global growth prospects, as several risks materialize. We forecast that emerging-market growth in 2019 will be the weakest in a decade since the global financial crisis. The projected pickup in activity for 2020 is unspectacular, and downside risks prevail.
- Key risks: Ongoing trade tensions between the U.S. and China, geopolitical–and in some cases—domestic policy uncertainty, are weighing on investor and business confidence. In such a scenario, corporations are unwilling to increase capital expenditures (capex) despite low interest rates.
- Macroeconomic conditions: Growth in emerging-market economies remains subpar. Soft exports and a slowdown in investment are a common theme across geographies. While easier financial conditions should support a pickup in activity, this alone isn’t likely to meaningfully boost investment if confidence remains low.
- Financing conditions: Financing conditions continue to ease, driven by the response of the Fed and European Central Bank (ECB) to a weakening growth; both central banks are poised to remain highly accommodative this year and next. While investors’ appetite for emerging markets prevails, risk aversion and selectivity are increasing, as investors remain focused on strong creditworthiness and fundamentals amid rising risks to global growth.
- Sovereigns: There’s no avoiding the rise in idiosyncratic risks for emerging-market sovereigns. For the remainder of 2019 and into 2020, nothing seems as likely to drive credit ratings as institutional factors and geopolitical risks. Decelerating global growth, combined with looser overall fiscal positions, will make several emerging-market sovereigns vulnerable to further increases in public debt burdens. Nevertheless, most of this additional debt is local currency denominated, with only a few emerging-market sovereigns running large open foreign currency positions.
- Corporations: Trade tensions, slower global economic growth, and commodity price volatility could undermine corporations’ profits. External–and in some cases domestic–policy uncertainty is weighing on business confidence and investment.
- Financial institutions: Slower growth in emerging-market economies may weaken asset quality and pressure banks’ profits. Improving financing conditions in debt markets, along with weaker economic prospects and business sentiment, could dent credit demand.
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Jose M. Pérez Gorozpe
Head of Credit Research