Debt burdens of the 19 large emerging market sovereigns (EM19) will remain higher than pre-pandemic levels over the next few years, with policy credibility and buffers to drive credit quality in coming years, Moody’s said in a recent report.
In its Investor Service report, Moody’s expected government debt in the EM19 to jump by approximately 10 percent of GDP on average by the end of 2021, compared to 2019 levels.
"The increase is driven primarily by wider primary deficits, although some are also likely to see higher interest payments contributing to higher debt," said Christian Fang, Moody's assistant vice president and analyst.
Government debt in Brazil, which is classified at a Ba2 stable rating, India, classified at Baa3 negative, and South Africa, classified at Ba1 negative, is expected to rise to among the highest levels across the EM19, above 80 percent of GDP by 2021, according to the report.
On the other hand, weakening in debt affordability will be generally modest. Yet, it is expected to deteriorate from already weak levels for India, Indonesia, which is classified at a Baa2 stable credit rating, and South Africa, according to the report.
Contraction in tourism and sectors vulnerable to lasting changes in behaviours, as well as weak global demand and productivity growth, pose medium-term risks for some EM19 countries, especially for India, Mexico (Baa1 negative), South Africa and Turkey (B1 negative). Fragile financial systems and/or contingent liabilities are expected to compound such risks, according to the report.
Moody's also expected credit differentiation for these countries to rebound and primary deficits to narrow over the next few years, except in seven countries, including Saudi Arabia (A1 negative) and Turkey, which are facing significant policy challenges, as growth increases and falling deficits prove insufficient to stabilise debt burdens, much less reverse them.
The report also noted that the ability to count on sovereign wealth assets and domestic savings to support domestic demand or counter the effects of wider primary deficits can help allay the deterioration in credit quality for some EM19 sovereigns.