China’s property slump, rising bond yields threaten EM ratings: Fitch

October 18, 2023 (MLN): The emerging-market (EM) rating outlook is balanced, but the slump in China’s property market and higher global bond yields are key downside risks, Fitch Ratings says in a new report.

The slowdown in China’s property sector and downside risks to its GDP growth add to risks facing EM economies given the impact on global trade, commodity prices, and financial market conditions.

Moreover, a sudden stop in Chinese bank lending has reduced a critical source of financing for many EMs, while China’s different views from other creditors on debt restructuring are delaying reaching agreements.

Fitch estimates that the EM median general government interest/revenue ratio will increase to 9.5% in 2023 and 10.3% in 2024, from 8.3% in 2022.

Higher-for-longer US bond yields pose a risk of a greater and more persistent increase in funding costs. Higher interest payments are adding to pressures on budget balances.

An adverse move in the difference between the real interest rate and real growth rate means that governments will need to tighten fiscal policy to run smaller primary deficits in order to stabilize government debt/GDP, other things equal.

Nevertheless, EM economies are benefitting from the strongest growth differential above developed markets for many years, and ratings have somewhat greater headroom following a heavy weight of downgrades over 2020-2022.

However, ratings of many lower-rated frontier markets remain under downward pressure.

So far in 2023, Fitch has upgraded 11 EM sovereigns, compared with nine downgrades (for Long-term Foreign Currency Issuer Default Ratings).

The EM rating outlook is balanced, with 10 on Positive and 10 on negative outlook.

The report covers responses to topical questions from investors on China, FDI in Asia-Pacific, Bangladesh, Brazil, Mexico, Panama, Turkiye, Hungary, Armenia, Saudi Arabia, Morocco, Tunisia, and Gabon.

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