LONDON – Moody’s Investors Service reported the fallout from the correctionin Turkey’s (B3 negative) exchange rate and the external vulnerability andsensitivity to a rise in the cost of debt of some emerging and frontiermarket nations.
The credit rating agency highlighted that those economies most sharply hitby weakening exchange rates, wider risk premier and lower capital inflowsso far this year share the characteristics of current account and budgetdeficits, while country-specific factors — often relating to policycredibility — have likely also fueled the financial market sell-off.
The report “Sovereigns – Global Contagion risks greatest where externalvulnerability, weak debt affordability meet low policycredibility” examines the countries that have been worst hit by atightening in financial conditions this year. It draws on Moody’s previousanalyses of where — aside from Turkey — vulnerability to a sharp andsustained deterioration in financing conditions is greatest.——————————
Looking at the size and composition of their balance of payments and thenumber of financial buffers in the form of foreign exchange reserves,Moody’s identified Argentina, Ghana (B3 stable), Mongolia (B3 stable),Pakistan (B3 negative), Sri Lanka (B1 negative) and Zambia, besides Turkey,as most vulnerable to dollar appreciation.
And out of these, Argentina and Pakistan’s currencies have experiencedparticularly marked depreciation against the dollar to date, said a pressrelease issued by Moody’s.
Meanwhile, sovereigns with relatively high debt burdens, weak debtaffordability and relatively short debt maturities are especiallysusceptible to a deterioration in their credit profiles in the event ofrising government bond yields.
Out of the sovereigns that Moody’s has identified as relatively vulnerableto a sharp and sustained rise in the cost of debt, Ecuador, Gabon, Kenya(B2 stable), Lebanon (B3 stable) and Ghana have seen their risk premia, asmeasured by EMBI bond spreads, widen the most to date.
According to Moody’s report in July, Pakistan is facing elevated externalpressures stemming from a strong domestic demand and capital-import heavyinvestments related to the China-Pakistan Economic Corridor (CPEC).
“We expect a current account deficit of 4.8% of GDP this year,” maintainedthe report. “While reserve coverage of external debt repayments remainsadequate for now, we expect that coverage to weaken. Unless capital inflowsincrease substantially, we see an elevated risk of further erosion inforeign exchange reserves. 30% of government debt is denominated in foreigncurrency,” the report adds.
“Pakistan’s gross borrowing requirements are among the highest in oursovereign rated universe at around 27%-30% of GDP, driven by persistentfiscal deficits and the government’s reliance on short-term debt, with anaverage maturity of 3.8 years,” the report continues.