A combination of weak growth in advanced economies, persistent inflationary pressures, the Russia-Ukraine conflict, tight financial conditions, and a subdued growth outlook for China will create a difficult environment for emerging markets (EM) in 2023, said Moody's Investors Service.
Although businesses and economic activities around the world have resumed post the pandemic-related lockdowns, most countries are unlikely to return to their pre-pandemic activity levels until 2022, a report by Moody’s Investors Service said.
As per the report, a slow and bumpy global recovery is expected. It, however, added that despite the relative stability of its forecasts since last April, uncertainty around the macroeconomic outlook remains much higher than usual.
It also said that after a year in which the Covid-19 pandemic disrupted the global economy and triggered a credit downturn, rating actions will be much more subdued in 2021 unless there is another major shock to global economic activity.
Although the crisis has created substantial credit challenges, the credit downturn is expected to be relatively short-lived, with risks slanted towards the sectors most vulnerable to restrictions on their normal activities.
“We don’t expect rating actions this year to match the pandemic-driven activity in 2020,” said Colin Ellis, Moody’s Chief Credit Officer for EMEA.
“Our current ratings and outlooks already incorporate the effects of the pandemic and associated support from policymakers. We continue to expect a slow and bumpy recovery, but volatility around the gradual recovery path is unlikely to be enough to materially affect creditworthiness by itself,” he said.
While asset prices and debt issuers’ market access have largely recovered from the shock, leverage metrics have shifted more permanently, as per the Moody’s report.
This is particularly evident for sovereigns, some of which have spent unprecedented sums to fight the pandemic and shore up economic activity, it noted, adding that debt affordability generally remains strong.
Issuers’ management of their debt dynamics as Covid-19 fades as a public health threat will be a critical determinant of their creditworthiness. Yet while these higher leverage levels pose significant medium-term risks, Moody’s does not expect defaults to jump again over the near-term.