Don't push panic button on Emerging Market Sovereigns: S&P

October 11, 2018

SINGAPORE - Recent global interest rate increases, followed by market turmoil, have raised concerns about potential liquidity problems spreading across emerging market (EM) sovereigns, but ratings agency Standard and Poor’s does not expect problems to spread across the emerging market asset class as a whole.

S&P says risks are looming on the horizon for the EM sovereigns, but a large number of EM countries have undertaken reforms to strengthen their creditworthiness, improve their economic structures, and reduce their
vulnerabilities to a potential drop in global liquidity.
 
“We expect our sovereign ratings on these countries to be relatively stable over periods of stress,” S&P says.
 
“The U.S. Federal Reserve Bank's increased pace of normalisation of its monetary policy has resulted in capital outflows from many EM countries, putting pressure on their currencies to depreciate, raising local interest rates, lowering local asset prices, and dampening GDP growth.
 
“Investors have recently focused on those EM sovereigns with large external imbalances and have started to take defensive actions.
 
“Argentina and Turkey, two economies with a large reliance on external capital inflows (largely through debt), were the first to be seriously affected.
 
“Subsequently, investors have focussed on a potential second wave of market turmoil affecting other EM sovereigns and the possibility of liquidity problems spreading across the asset class.
 
“We do not foresee an imminent and high risk of contagion from recent market turmoil to the EM asset class as a whole.
 
“S&P Global Ratings' average rating for EM sovereigns is within the investment-grade category (around 'BBB-'; investment-grade ratings are 'BBB-' or higher), and most have stable outlooks.
 
“We believe that the level of credit risk among EM sovereigns is quite diverse, as reflected in our differing ratings.
 
“Going forward, many of these export-oriented economies' credit quality will be more at risk due to the increased wave of protectionism and the threat of full-scale "trade wars" than global interest rates dynamics.
 
SSovereigns with more flexible economies that have built fiscal and financial buffers and developed a credible and predictable institutional stance have greater capacity to withstand adverse shocks, limiting potential contagion.
 
“Those sovereigns that lack these credit qualities may soon need to make hard policy adjustments to avoid a crisis (or even default) in the event of a sudden stop in external market funding.
 
“Our sovereign ratings indicate which sovereigns are more at risk of suffering such a fate.” www.standardandpoors.com (ATI).