Moody’s: Little risk of credit crisis in EM

Added 2nd September 2015

In a contrarian view, ratings agency Moody’s said it believes that the risk of a downward spiral and financial contagion is unlikely in emerging markets.

Moody’s: Little risk of credit crisis in EM

"The deepening of local sovereign bond markets has allowed governments to shift a growing portion of their funding to local currency instruments," said Elena Duggar, senior vice president of credit policy.

"This suggests they will be less susceptible to shocks and it should also contribute to the development of domestic financial markets for use by other borrowers, not only sovereigns,” she added.

Moody's research shows that local currency sovereign debt outstanding grew on average by 14.4% each year between 2000 and 2014, well above the annual average 2.3% growth rate of foreign currency sovereign debt. This goes against the traditional perception that emerging economies struggle to borrow in their own currency.

Moody’s noted that the fastest growth in emerging market sovereign debt was seen in Asia, where it expanded six-fold since 2000 to $5.7trn. At the end of 2014, Asia accounted for 58.2% of total emerging market sovereign debt, Latin America 22.2%, Central and Eastern Europe 10.0% and the Middle East and Africa 9.7%. The agency forecast that Asia’s share would increase at an annual rate of 14.5%.

The growth of local institutional investors, such as pension funds and insurance companies will continue to lend support to domestic demand in Asia, while the backdrop of high liquidity and low interest rates in advanced economies after the financial crisis contributed to foreign investors moving into emerging market asset classes.

Moody’s opinion report comes close on the heels of China’s announcement of a 60 billion yuan ($9.4bn) fund to finance small and medium-sized companies. The State Council said in a statement that the central government would contribute a quarter of the sum, with the rest coming from investments from private and state-owned companies, financial institutions and local governments.

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