Negative outlook for emerging markets in 2020 due to sluggish growth

GDP growth in emerging markets will average above 4.5 per cent next year, Moody’s Investors Service says

GDP growth in emerging markets will average above 4.5 per cent next year, Moody’s Investors Service says. Getty images .  
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The outlook for emerging markets in 2020 has tipped over to negative due to uncertainties around trade, politics and policy, according to a new report from Moody's Investors Service.

However, individual emerging market countries and corporations may have different degrees of exposure to each of these uncertainties, since emerging markets encompass a broad range of entities across Asia, Latin America, Eastern Europe, Middle East and Africa.

"Although recession risk is in focus globally, we do not expect a recession to materialize in any of the larger emerging market economies except in Argentina," said Moody's senior vice president Gersan Zurita.

"Emerging markets will continue to have higher growth than developed markets with an expected average economic growth above 4.5 per cent in 2020, compared with just under 1.5 per cent across the largest advanced economies in 2020. However, growth rates are well below their historical averages, particularly in larger economics like Mexico, Russia, India and China."

Global growth slowed considerably in 2019, and the Moody’s Investors Service does not expect much improvement in 2020.

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,  it said.

“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," Moody's said.

The trade tensions are posing an extra challenge to China and the Asia Pacific region’s more trade-reliant economies.

Domestic factors contribute to India's broad-based slowdown, it said while slower regional economic and trade growth and idiosyncratic weaknesses in some markets will result in a

more difficult operating environment for banks.

Credit trends are negative for companies in large emerging markets like China, India and Indonesia.

Negative outlook for EMEA (Europe, Middle East and Africa) markets is due to increasing policy unpredictability, continued geo-political risk and weakening growth, Moody’s said.

Structural constraints and domestic and geopolitical risk remain key credit drivers weighing on the region’s sovereigns and non-financial companies, the report said.

Turkey and South Africa remain weak, while Central and Eastern Europe countries continue to benefit from positive if slowing growth and Russia from stable commodity prices.

“Sovereign fragility affects the region’s financial institutions, although its potential impact is mitigated by banks’ sound liquidity and robust capital buffers. Our outlook is stable for structured finance and infrastructure, the latter thanks to continued high capital spending.”

In the GCC, banks’ credit profiles benefit from the strong willingness of authorities to provide support in the event of need, as well as from their high capital buffers and healthy profitability. But the banks face rising pressure on their loan performance stemming from subdued government spending, Moody’s said.

Despite slow growth in most of Latin America, credit conditions are expected to be broadly stable.