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Emerging markets run risk of capital outflows - Moody's

Nov 14 2016 18:47
Liesl Peyper

Cape Town – Commodity exporting countries in Sub-Saharan Africa, which are already facing significant liquidity pressure, are facing uncertainty, following the election of Donald Trump to US President.

“The implications of the US election outcome for the direction of global capital flows are hard to predict at this stage,” Moody’s said in its annual Global Sovereign Outlook.

The ratings agency cautions that emerging countries in particular, which are dependent on external capital inflows are at risk of seeing a reversal in capital flows. 

“Elevated volatility in financial markets and sharp movements in exchange rates could exacerbate already weak economic fundamentals and existing political risks, in particular in countries dependent on external capital inflows.”

READ: How emerging-market stocks can weather Trump upset

Globally speaking, Moody’s is of the view that sovereign ratings for the coming 12 to 18 months are negative. 

“The key drivers of the negative outlook are a combination of continued low growth, a shift towards fiscal stimulus that will increase already high public sector debt, and rising political and geopolitical risks.” 

Moody’s said 26% of its 134 rated sovereigns currently carry a negative outlook, compared to 17% a year ago, the largest proportion since late 2012. 

“The share of sovereigns with a stable outlook has fallen to 65% from 75% last year, while 9% have a positive outlook, similar to last year with 8%.”

Moody’s is rating South Africa two notches above sub-investment grade, with a negative outlook. The next credit ratings review are expected to take place before the end of 2016. 

READ: FULL STATEMENT: Moody's confirms SA's credit rating 

The South African Reserve Bank said in its stability review for 2016 that South Africa is expected to grow at only 0.5% this year, a downward adjustment from the 0.9% mooted in Finance Minister Pravin Gordhan’s budget speech in February this year. 

In its global outlook, Moody’s cautioned that countries around the world are facing “persistently low growth”. 

"Monetary policy's ability to support growth in advanced economies is diminishing, and in many emerging markets it is constrained by above-target inflation and exchange-rate pressures,” said Alastair Wilson, Moody’s Managing Director for Sovereign Risk. “So we are seeing a gradual but broad-based shift in policy towards loosening fiscal policy in order to lift growth.” 

However, a shift towards looser fiscal policy carries risks for the creditworthiness of many sovereigns, given generally already elevated debt levels, Wilson said. 

“Any increase in debt to finance current spending that has little lasting benefit to economic growth prospects would be negative.”

Adding to the uncertain global outlook are geopolitical risks in many regions around the world. 

Country- and region-specific risks include the uncertain impact that the recent elections in the US (Aaa stable-rating) could have on its future trade and security policies with the rest of the world.

In Europe, there’s a lack of cohesion and risk of further “fragmentation” following, among other things, the vote of the UK, which has an Aa1 negative-rating, to leave the European Union in June this year.

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