Explore the financial risk landscape in five major emerging markets

Article tags Credit riskRiskGlobal

Deteriorating global economic conditions have limited growth opportunities in developing markets this year. Using data from our Financial Risk service, we have outlined the sovereign, currency and banking sector risk outlook for five of the world’s major emerging markets in 2023.

Our scale is divided into ten overlapping rating bands: AAA, AA, A, BBB, BB, B, CCC, CC, C, D. The ratings provide a rigorous and independent assessment of the risks facing institutions lending money, financing trade or conducting other types of business that expose them to cross-border credit or financial risk.

Brazil

Next year will be marked by policy shifts stemming from a change in government, as Luiz Inácio Lula da Silva of the centre-left Partido dos Trabalhadores (PT) will take office on January 1st.

Sovereign risk
Economic recovery, high commodity prices and inflation have supported the fiscal dynamics. However, the government’s bending of fiscal rules to increase social spending this year will complicate consolidation for Luiz Inácio Lula da Silva’s administration, weighing on the chances of a rating upgrade. 

Currency risk
EIU expects the Selic policy interest rate to hold at 13.75% well into 2023 and elevated commodity prices to support the Real in the near term. Fiscal, electoral and geopolitical risks will contribute to currency volatility, as will monetary tightening by the Federal Reserve (Fed, the US central bank).

Banking sector risk
Despite high interest rates and inflation, macroeconomic and credit risks are manageable. Non-performing loans could rise as some households and companies struggle amid high interest rates.

China

It will be a year of change and challenge for China next year as the government looks to ease “zero-covid” restrictions and remodel the heavily indebted property sector.

Sovereign risk
Economic growth slowed markedly in 2022 owing to lockdown measures, causing the budget deficit to widen. Central government debt is low, but is exposed to implicit liabilities associated with local governments and state-owned enterprises.

Currency risk
Currency volatility will persist in 2023, even as China’s economy recovers, owing to investor concerns over abrupt policy changes and geopolitical risks. The monetary authority nevertheless stands ready to counter downward pressures with ample foreign-exchange reserves.

Banking sector risk
Banks are exposed to troubled property developers, whose debt-repayment abilities have been affected by tighter regulatory controls and housing sector stress. Systemic risk is limited by strong state control and consolidation of smaller lenders is more likely than a sector-wide crisis.

India

Improvements in India’s business environment and progress in bilateral trade deals next year could make it an increasingly viable investment destination.

Sovereign risk
An unblemished repayment record, considerable economic growth and large foreign-exchange reserves will support the sovereign risk rating. However, public debt is moderately large and the budget deficit is wider than the 3.8% average of the pre-pandemic years of 2015/16-19/20.

Currency risk
Robust foreign direct investment inflows and still substantial foreign-exchange reserves (despite a decline in 2022) serve as a buffer against depreciation pressures. Elevated inflation and the risk of future imposition of restrictions on transfer and convertibility stand out as main risk factors.

Banking sector risk
Lack of adequate oversight, a net negative foreign asset position and exchange-rate depreciation are risks to the sector. However, the rating will be supported by rapid GDP growth and rising net interest margins, which will bolster bank profits.

Mexico

Aside from near-term economic headwinds, investors should keep a keen eye on policy decisions taken by the López Obrador administration that could impact Mexico’s longer-term growth trajectory.

Sovereign risk
The fiscal position is fairly solid despite a slightly more expansionary budget for 2023 and the government’s assumption of liabilities from Pemex (the heavily indebted state-owned oil firm). A benign short-term repayment schedule and low rollover risk will assuage risks of a downgrade in 2023-24.

Currency risk
A stable fiscal and external outlook, along with wide interest-rate differentials with the US, will help to support the Mexican peso. However, as one of the most liquid emerging-market currencies, the peso will be subject to swings in market sentiment, raising risks to the rating.

Banking sector risk
Risk remains BBB-rated, supported by a robust regulatory framework, as well as solid indicators of liquidity, solvency and profitability. The main risk to the rating stems from a sharper deterioration in domestic and external macroeconomic conditions than we currently anticipate.

Saudi Arabia

Despite slowing, the Saudi will still post reasonably strong growth in 2023. The oil-rich state will retain large financial buffers and push ahead with ambitious investment programmes.

Sovereign risk
EIU expects the fiscal account to register continued large surpluses in 2023-24, leading to a further decline in the public debt/GDP ratio. However, this assumes that Saudi Arabia’s oil-dependent economy is not undermined by a renewed sharp drop in global oil prices.

Currency risk
The Saudi riyal, like most Gulf Co-operation Council currencies, is pegged to the US dollar. Saudi authorities are committed to the peg, the credibility of which is underpinned by a large stock of liquid foreign-exchange reserves and a rapidly expanding sovereign wealth fund.

Banking sector risk
Saudi banks have maintained a solid capital position and are currently benefiting from a boost to profitability provided by elevated oil prices and robust economic growth. Rapidly growing exposure to the property sector represents one potential source of weakness, but the sector is well regulated and strong prudential indicators will help to insulate most banks from any future deterioration in asset quality.

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Wed, 14th Dec 2022 Article tags Credit riskRiskGlobal