Moody's Issues Global Economic 'Warning': "Emerging Market Debt Increased by 10%P in 2 Years"

Brazil, India, South Africa Face Largest Debt Burden
"Stock Rally Difficult Without Emerging Market Growth"

[Image source=Reuters Yonhap News]

[Asia Economy Reporter Jeong Hyunjin] Concerns over debt in emerging countries are growing amid the prolonged COVID-19 pandemic. With large-scale fiscal policies and declining tax revenues, the debt levels of emerging countries are expected to increase by about 10 percentage points relative to their gross domestic product (GDP) over the past two years. Emerging countries are more vulnerable to debt than advanced economies and are likely to act as a trigger for a global economic downturn.

Credit rating agency Moody's recently released its "Emerging Markets Debt Outlook" report, stating, "Due to the deterioration in growth and fiscal conditions caused by COVID-19, most emerging countries will carry a high debt burden for the next several years," and predicted a significant expansion in debt ratios compared to the end of 2019 through 2021.

Moody's identified Brazil, India, and South Africa as countries expected to face the largest debt burdens. The debt-to-GDP ratios of these countries are projected to increase by more than 10 percentage points by the end of next year, with debt levels surpassing 80% of GDP. Chile, Colombia, Indonesia, the Philippines, Romania, Saudi Arabia, and Thailand are also expected to see increases in debt-to-GDP ratios exceeding 10 percentage points.

Moody's expressed particular concern over the expansion of fiscal deficits this year. Economic activity has weakened due to the impact of COVID-19, and tax revenues are declining as various tax benefits are provided and stimulus measures are implemented to boost domestic demand. In South Africa, the reduction in tax revenue accounts for a significant portion of the fiscal deficit. Additionally, as debt increases, interest burdens also rise. In India's case, more than 20% of tax revenues are expected to be spent on interest payments.

The problem is that the debt repayment capacity of emerging countries is also likely to deteriorate. COVID-19 has immediately impacted exports and tourism, making it difficult to absorb fiscal shocks. Moody's also expressed significant concerns about the financial markets of vulnerable emerging countries such as India, Mexico, South Africa, and Turkey. Moody's stated, "The ability to respond to fiscal deficits and increasing debt burdens will ultimately be determined by credit conditions," adding, "Trust in policies will differentiate emerging countries."

The market is cautious about emerging markets, which tend to move sharply depending on the conditions of major markets such as the United States. Recently, it remains unclear whether the decline in technology stocks in the U.S. stock market signals a correction, and U.S.-China tensions and the November U.S. presidential election remain factors shaking the market.

Claudio Irigoyen, Bank of America (BoA) Latin America strategist, said, "If emerging countries fail to achieve economic growth, it will be difficult to sustain rallies in the market." This implies that investors are unlikely to remain in emerging markets without messages of economic recovery amid high uncertainty. Paul Greer, manager at Fidelity International, said, "The core concerns are the fiscal deterioration, potential growth rate, and productivity decline in emerging countries," adding, "Given the high uncertainty ahead of elections, a risk-averse period is expected to continue."

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