KUALA LUMPUR: Pakistan (B3 negative) and Sri Lanka (B2 stable) are among the economies which are particularly exposed to a shock due to tighter financing conditions, Moody's Investors Service said.
It said on Thursday its stress tests showed other countries which were also exposed to such a shock included Jamaica (B3 positive), St. Vincent & the Grenadines (B3 stable), Tunisia (B2 negative), Egypt (B2 stable), Ghana (B3 stable), Angola (B3 stable).
“Fragile investor confidence amid a slowing global economy, ongoing US-China tensions, and political risks in the Middle East and elsewhere increase the risk of a tightening in financing conditions, with B-rated sovereigns in Asia Pacific, the Middle East and North Africa (MENA) and Latin America most exposed, ” Marie Diron, a managing director in Moody’s Sovereign Risk Group said.
“Unlike in 2018, when most emerging and frontier markets faced a sharp tightening in financing conditions, now, with major global central banks likely to maintain accommodative monetary policy, any shock is likely to be market-specific, triggered by external or domestic developments, and exacerbated by low policy credibility, ” she said.
While Moody’s forecasts and ratings generally assume relatively stable financing conditions, to gauge exposure to financing pressure beyond Moody’s base case, the rating agency has developed a stress test assuming a severe but plausible shock.
Moody’s has quantified the direct effects of such stress on core credit metrics to determine the most affected emerging and frontier markets.
“Although second-round effects and policy responses would determine the full implications of any shock, the results of our stress tests highlight a range of exposure among lower-rated sovereigns, as well as among those further up the rating scale, ” Diron added.
The countries most exposed would see the sharpest deterioration in credit metrics when stressed due to weak debt affordability, reliance on foreign-currency borrowing, and thin reserve coverage of external debt payments.