Moody's: "Emerging Markets Saw an Average Daily Outflow of $3.9 Billion in the Past Month"

[Asia Economy Reporter Jeong Hyunjin] Due to the impact of the novel coronavirus infection (COVID-19), an average of $3.9 billion (approximately 4.77 trillion KRW) per day has flowed out of emerging markets over the past month. As low-credit emerging countries with maturing government bonds are expected to face difficulties in refinancing, concerns are emerging that the COVID-19 crisis could potentially lead to sovereign default risks.

Credit rating agency Moody's reported on its website on the 31st of last month (local time), citing the International Institute of Finance (IIF), that as of the 22nd of last month, the average capital outflow from emerging markets over the past month reached $3.9 billion, marking an all-time high. Considering that during the 2008-2009 global financial crisis, the 2013 taper tantrum?which caused sharp declines in emerging market currencies and stock markets?and the 2016 U.S. presidential election, capital outflows were around $1 billion, the current outflow is nearly four times larger.

Source: Moody's Report

This phenomenon is interpreted as a result of risk aversion spreading as the COVID-19 crisis fails to subside and prolongs. Moody's stated in the report, "There are cases more severe than during the global financial crisis, such as the sharp decline in oil and commodity prices."

Accordingly, the JP Morgan EMBI spread, which shows emerging market risk through the interest rate differential between U.S. Treasury bonds and emerging market bonds, has nearly doubled recently. Market anxiety is particularly high regarding African, Latin American, and Middle Eastern countries. According to data from Capital Economics cited by the Wall Street Journal (WSJ), the number of countries with dollar-denominated government bond yields more than 10 percentage points higher than U.S. Treasury yields has increased from 4 at the beginning of this year to over 18 currently. Rising bond yields indicate falling demand for bonds, making fundraising difficult.

Moody's, citing Dealogic data, reported that there were no foreign currency-denominated government bond issuances from emerging markets last month. Considering that from 2017 to 2019, an average of $24 billion in government bonds were issued monthly in March, it can be inferred that it is difficult for emerging markets below investment grade to attempt bond refinancing. Countries facing such difficulties include Sri Lanka (credit rating B2), Turkey (B1), Honduras (B1), and Tunisia (B2).

Among low-credit emerging countries, those with a high dependence on private investors for government financing are also problematic. This is because financial authorities have limited measures to alleviate this. Most bonds are denominated in foreign currencies such as the dollar, and as emerging market currencies suffer from the strong dollar, if private investors withdraw, resources to cover this are limited. Argentina, Lebanon, Bahrain, Oman, and Angola, which are undergoing debt restructuring, are representative cases. Edward Glossop, a researcher at Capital Economics, said, "The possibility of a wave of sovereign defaults is greater than ever before."

This content was produced with the assistance of AI translation services.