S&P Global Ratings has put a negative credit outlook on a host of emerging market sovereigns, even as these economies continue to witness strong foreign investments. “Nine of the 20 top emerging market sovereigns — those with the largest absolute amount of sovereign debt outstanding — have negative outlooks, indicating a possible downgrade over the next two years, against just two positive outlooks,” S&P’s Global Chief Rating Officer Moritz Kraemer said.
Pakistan and Indonesia are the only two economies that figure in S&P’s positive outlook list.
The US-based agency, however, has a ‘BBB-‘ rating on India with a stable outlook. ‘BBB-‘ signifies lowest investment grade.
The negative outlook bias on this group of emerging market sovereigns, S&P said, suggests downgrades that could accelerate over the coming year or two.
Cumulative portfolio inflows since 2011 in emerging economies, including India, China, Brazil and Russia, have exceeded USD 1.1 trillion.
“Despite still strong foreign investment inflows to emerging markets, our credit outlook for emerging market sovereigns is negative,” S&P said.
It said investor interest in the emerging markets is growing unabated not only because emerging markets offer higher yields than those achievable in advanced economies, but also because their share in the world economy is increasing.
Emerging economies together account for 40 per cent of world GDP, up from 20 per cent during the Asian financial crisis 20 years ago.
“In the next 20 years, we estimate the GDP of the seven largest emerging economies will overshadow that of the G7 countries,” S&P said.
The agency also cautioned that weakening governance standards could continue to harm credit quality as policymakers put political gains ahead of economic management.
“The slowdown in global growth and world trade, as well as rising protectionism in advanced economies, will hit emerging markets that are highly dependent on trade,” it said.
S&P expects US Fed will start raising rates in December, gradually bringing to an end the accommodative international financial environment from which emerging markets are benefiting.
“We expect tightening international liquidity will hit Turkey, Venezuela, and Argentina the hardest because they are the most dependent on capital inflows,” it said.