EM rating outlook recovering, but risks remain: Fitch

January 18, 2022 (MLN): The emerging-market (EM) sovereign rating cycle has turned more positive with four upgrades in 4Q21 that include Benin, Croatia, the Maldives and Seychelles and only two downgrades (Peru and Sri Lanka), Fitch Ratings said in its latest report.

Negative outlooks continue to outnumber positives, but the net balance has recovered to -14 in January 2022, from a nadir of -33 in August 2020.

Continuing economic revival after the pandemic, nascent fiscal recoveries and higher commodity prices add up to a moderately net improving or neutral macro credit environment for the main EM regions in 2022.

The rating agency has forecasted median GDP growth of the emerging-market (EM) at 4.0% in 2022, down only moderately from 4.4% in 2021. The median budget deficit will narrow to 4% of GDP in 2022, from 5.2% in 2021. However, the real effective interest rate has already started to rise, and reducing government debt/GDP will be a slow and challenging process.

Meanwhile, the report highlighted that EMs face a number of downside risks. The evolution of the pandemic remains uncertain and it leaves a legacy of higher government debt. Fed tapering, rate rises and a stronger US dollar mean more challenging external financing conditions. The global inflation shock has forced abrupt EM policy interest rate hikes. This will weigh on growth and raise government borrowing costs.

Higher inflation, particularly for food, disproportionately affects the poor, compounding risks of social unrest from the effects of the pandemic. This is fertile ground for political shocks and adds to pressure on governments to provide fiscal support, it added.

The report covers responses to topical questions from investors on China, India, Mongolia, Brazil, Chile, Costa Rica, Turkey, Romania, Ukraine, South Africa, Zambia, Egypt and contingent liabilities facing Gulf Cooperation Council countries.

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