Moody’s warns emerging economies over debt vulnerabilities


Moody’s.

The study singled out Egypt, Bahrain, Pakistan, Lebanon and Mongolia as particularly at risk; Sri Lanka and Jordan are also “highly exposed” to an interest rate shock, Moody’s said.

With global interest rates rising and emerging market nations accumulating a rapidly-increasing debt pile, concerns are growing that they could be hit with a financing crisis. The IMF warned earlier this year that 40 per cent of low-income developing countries face “significant debt-related challenges”.

 Investors who bought some of the riskiest emerging market sovereign bond sales of the past year have in recent weeks been left nursing paper losses as a strengthening dollar rattles sentiment for emerging markets.

Moody's’ study of 125 sovereigns looked at two scenarios: a moderate rise in interest rates, and a sharper and more immediate increase in funding costs, both of which were assumed to last for four years.

Elisa Parisi-Capone, a Moody’s vice-president, said the research concluded that “a moderate shock would generally be manageable, with limited impact on sovereigns’ debt affordability and debt burdens other than for those which already exhibit very low fiscal strength”.

However “a severe shock would pressure a broader set of ratings”, she said. As central banks in developed economies unwind the unprecedented monetary stimulus that they pumped into the global economy in the aftermath of the financial crisis, the impact on emerging economies “remains untested”, Moody’s warned, and “could lead to higher risk premi.


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Emerging economies with shorter debt maturities and less fiscal scope to accommodate rising debt costs are most vulnerable to a tightening of global financial conditions, according to research by credit rating agency Moody’s.

The study singled out Egypt, Bahrain, Pakistan, Lebanon and Mongolia as particularly at risk; Sri Lanka and Jordan are also “highly exposed” to an interest rate shock, Moody’s said.

With global interest rates rising and emerging market nations accumulating a rapidly-increasing debt pile, concerns are growing that they could be hit with a financing crisis. The IMF warned earlier this year that 40 per cent of low-income developing countries face “significant debt-related challenges”.

 Investors who bought some of the riskiest emerging market sovereign bond sales of the past year have in recent weeks been left nursing paper losses as a strengthening dollar rattles sentiment for emerging markets.

Moody's’ study of 125 sovereigns looked at two scenarios: a moderate rise in interest rates, and a sharper and more immediate increase in funding costs, both of which were assumed to last for four years.

Elisa Parisi-Capone, a Moody’s vice-president, said the research concluded that “a moderate shock would generally be manageable, with limited impact on sovereigns’ debt affordability and debt burdens other than for those which already exhibit very low fiscal strength”.

However “a severe shock would pressure a broader set of ratings”, she said. As central banks in developed economies unwind the unprecedented monetary stimulus that they pumped into the global economy in the aftermath of the financial crisis, the impact on emerging economies “remains untested”, Moody’s warned, and “could lead to higher risk premi.


 
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