Emerging & Frontier Markets Face a Bigger Economic Downturn & Challenges: Moody’s

Moody’s Investors Service (MIS) says that non-investment grade emerging and frontier market sovereigns face a sharp economic downturn following the coronavirus outbreak, with many not recovering to pre-crisis levels until 2022 or beyond.

Reflecting on these challenges, Moody’s has taken rating action on 50 non-investment grade sovereigns, 29 of which have been principally motivated by the coronavirus outbreak.

Recovery will be prolonged and uneven post lockdown, with tourism and commodity-reliant sovereigns facing further challenges.

MIS’s conclusions are summarized in the second edition of a bi-annual chartbook that highlights key rating trends for non-investment grade sovereigns across the globe.

“Globally, debt-to-GDP ratios will jump, often from already elevated levels, and we expect they will continue to rise over the coming years, raising fiscal challenges,” says Michael Higgins, a Moody’s Analyst.

The coronavirus shock is precipitating a significant increase in external vulnerability and government liquidity risks among non-investment grade sovereigns, while political tensions remain present, especially as the pandemic heightens focus on many social risks.

All non-investment grade emerging and frontier market sovereigns will experience slower growth on account of the global coronavirus shock, with 2020 growth forecasts revised down by 6.8 percentage points on average from the end of 2019.

Erosion in Revenue Bases Will Worsen Debt Affordability

Moody’s stated that the debt affordability will worsen in Latin America and is projected to eclipse the 2017 peak with Asia Pacific APAC and Africa/Middle East to similarly deteriorate sharply. It further added that emerging Europe will remain the most stable.


Some Liquidity Relief and Risk to Ratings

Moody’s has said that the crisis has led to sharp falls in foreign-currency receipts from exports, foreign direct investment and remittances at a time when sovereigns’ access to international capital markets is constrained. As a result, countries are drawing on their foreign-exchange reserves, diminishing the sovereigns’ ultimate ability to meet external debt-service payments.

The credit rating agency said that debt-service relief will not have a significant impact on medium-term debt trends that have materially worsened. 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 and/or exposure to foreign-currency risk are most vulnerable.

The service rated participating countries as of 30 June 2020: Pakistan (B3 RUR-), Cameroon (B2 RUR-), Ethiopia (B2 RUR-), Niger (B3 stable), Senegal (Ba3 RUR-), Cote d’Ivoire (Ba3 RUR-), Kyrgyz Republic (B2 stable), Mali (B3 stable), Togo (B3 stable), Zambia (Ca stable) and Angola (B3 RUR-)


List of Sovereigns


In 2021, Moody’s expects economic recoveries to vary widely, depending on policy measures governments implement, including their nature, magnitude, and timeliness, as well as on the structure of the economy.

Specifically, services-dependent economies – especially those with high exposure to tourism – and commodity exporters will experience a slower rebound in activity.

As of the end of June 2020, Moody’s rated 76 emerging and frontier markets at Ba1 below, an increase of three from December 2019, following the assignment of a B3 rating to Laos and the downgrade of South Africa and Bahamas into non-investment grade.