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Asian emerging markets must brace for coming wave of ratings downgrades – and debt defaults
- Unlike in 2008, Asia has weaker balance sheets and a greater dependence on exports. With debt ratings set to slide and deglobalisation a risk, Asia must reassess its export-led economic model
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This has been a topsy-turvy year for emerging markets. After a coronavirus-induced sudden stop of capital flows in the spring, investors soon returned, encouraged by the dramatic easing by the world’s leading central banks. The worst fears have been avoided. Sovereign defaults remain low by historical standards.
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But emerging-market policymakers should not deceive themselves: this crisis has only just begun. The worst is yet to come for emerging market sovereign ratings. More countries are tightening restrictions on movement again. With winter approaching in the northern hemisphere, fears of a second infection wave abound. Global recovery is losing steam. A meaningful pickup in sovereign defaults lurks backstage.
This pessimism is informed by the unprecedented depth of the crisis, combined by the heightened macroeconomic vulnerabilities with which many countries entered it. The Covid-19-induced economic crunch is of a different order of magnitude compared to the 2009 global financial crisis.
The Organisation for Economic Cooperation and Development expects the global economy to contract by 4.5 per cent this year. China will be the only G20 country avoiding an output decline. The World Bank estimated in June that emerging market economies will shrink by 2.5 per cent. In contrast, they expanded by almost 3 per cent in 2009. The last crisis was mostly one of advanced economies.
Since then, emerging markets have become less resilient. Government debt stood at 34 per cent of gross domestic product on the eve of the last crisis in 2008. At the end of last year, this figure had crept up to 53 per cent, with a comparable inter-crisis debt increase for Asian emerging markets.
05:02
Coronavirus backlash further fraying China’s ties to global economy
Coronavirus backlash further fraying China’s ties to global economy
External debt service as a share of exports has also risen markedly, from 25 per cent to 40 per cent across emerging markets, and in Asia by 20 per cent to 46 per cent. In other words, emerging markets and Asia are confronting a much deeper crisis with a more vulnerable balance sheet.
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