Moody's: Risk Recovery Supports EM; Low-Rated Strains Persist

Moody's Investors Service says in a new report that while global financing conditions have eased markedly in recent months, many emerging and frontier market economies will commence their recoveries with greater fiscal and external weaknesses. "Emerging and frontier market economies have experienced a substantial shock through multiple channels: a drop in export values on lower commodity prices; weaker tourism and lower global demand; and volatility in non-resident capital flows. We expect fiscal and external imbalances to widen and, in the most severe cases, liquidity pressures will rise toward serious stress or default," says Michael S. Higgins, a Moody's Analyst. Some of these sovereigns have struggled to find external sources of borrowing to fund fiscal and external gaps, and have tapped emergency financing from international financial institutions like the International Monetary Fund and other multilateral lenders. However, as global capital flows remain volatile, many will face substantial credit challenges through their recoveries, even if they do emerge from the crisis without defaulting. Limited fiscal space and subdued foreign direct investment are likely to inhibit greater employment creation and consumption. And while a strong international policy response, fueled by advanced economies' substantial monetary stimulus, has enabled capital flows into emerging markets to normalize, funding conditions are still much tighter for the lowest-rated sovereigns, as investors remain cautious about increased liquidity pressures and risk of default among these sovereigns.

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