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Slow economic growth for emerging markets in 2020

Publishing Date : 03 December, 2019

Author : AUBREY LUTE

United States based financial think tank, Moody’s has forecast further stalled economic conditions for emerging markets in 2020. In their outlook for 2020 released this week, the New York based rating agency says credit conditions for emerging markets in 2020 are set to turn negative amid sluggish growth which is at further risk from political and trade uncertainties.


“Global growth slowed considerably in 2019, and we do not expect much improvement in 2020,” says Moody's Senior Vice President Gersan Zurita. According to Zunita trade tensions have created an extra challenge for manufacturing and trade reliant economies, while heightened geopolitical risk and domestic policy unpredictability cast long shadows in many parts of the world. “Against this backdrop, emerging market debt issuers are vulnerable to sudden shocks such as a slump in commodity prices, an escalation of trade tensions or sudden capital outflows,” he said.


The outlook further states that in most African countries 2020 will post economic growth of waves well below historical levels and in some cases below what is needed to maintain living standards. Moody’s Vice President has noted that in particular South Africa‘s persisting high unemployment, income inequality and the social and political challenges are proving to be strong obstacles to the government’s plans to raise potential growth. He added that as these headwinds contain fiscal deficits thus giving little room for policymakers to explore growth opportunities.


Most of African countries are resource based with a significant bulk of them dependent on natural resources like minerals and oil for economic revenue. Moody’s says as Oil producers like Angola and Nigeria continue to adjust to lower prices, subpar global growth and social and political factors continue to hinder revenue generation and broader fiscal reforms while elevated debt levels constrain fiscal response to shocks.

The US based global economic commentator says progress in addressing high debt burdens and increasingly tighter affordability has been limited, including particularly key economies such as Tunisia, Kenya, South Africa, Angola and Zambia. “The efforts of governments to preserve high living standards, employment growth for nationals and support diversification efforts will slow the pace of fiscal consolidation. Some sovereigns like Egypt continue to implement measures that will over time reduce the debt burden, as long as growth remains robust and social tensions at bay.”


In the entirety Moody’s says it projects a tough year for 2020 resulting in multi sectoral downward pressures across emerging market economies. “The fragility of the global and regional economies, geopolitical risks and higher government debt levels will inevitably affect the banking sector given high interlinkages and rising asset quality pressures,” explained Moody’s Vice President. The outlook says two of the region’s largest banking sectors – Turkey and South Africa – already have negative outlooks reflecting, among other issues, their difficult operating conditions.


“For Turkish banks we have highlighted funding vulnerabilities and capital ratios that are highly sensitive to currency depreciation.” However most other banking systems in some emerging markets regions have sound funding and liquidity and relatively robust capital buffers, which will help them to absorb some unexpected losses. In the main weakening economic conditions and pressures on government credit quality will likely have a knock-on effect on banks. Slowing or volatile economies hamper business generation at banks and weaken their financial health.


 “Similarly, our bank credit ratings are typically constrained at the sovereign level, given the banks' large holdings of government securities, policy uncertainty and lack of economic growth stimulus will limit companies' confidence in investing, especially in Turkey and South Africa,” said Moody’s Vice President. Gersan Zunita  says subdued economic growth and rising government debt will also lead to increased payment arrears, placing a strain on corporate finances and resulting in rising problem loans.  


According to Zunita pressure on sovereign ratings also feeds across to banks that benefit from uplift in their ratings from our assumption that they would receive government support in times of stress. “Despite these macroeconomic and loan quality pressures, we expect banks to maintain their current capital buffers and good earnings generating capacity as well as their high liquidity buffers and sufficient access to funding for their lending activities.”

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