JAKARTA (TheInsiderStories) – The global recession is deepening as coronavirus-related restrictions exact a high economic cost and expect the real GDP to contract by 1.0 percent for Group of 20 emerging market (EM) economies in this year. We have already seen a large number of downgrades among high-yield corporates in recent months, reflecting the economic and financial upheaval the coronavirus has inflicted upon emerging markets.
Moody’s rates 106 EM sovereigns — a figure which has seen consistent growth from just 63 in 2004 — and over 1,600 non-sovereign issuers from 70 EM countries. Asia Pacific issuers account for 35 percent of all rated EM non-sovereign issuers, with 60 percent from China. A total 62 percent of the region’ issuers have investment-grade ratings, and 69% have stable outlooks – down from 83 percent in September 2019.
Negative bias is particularly high in India and Vietnam, where respectively 63 percent and 68 percent of ratings carried a negative outlook or were under review for downgrade as of April 30, 2020.
Asia Pacific has led growth in EM rated non-financial corporates, and now accounts for 49 percent of this category, and China for 35 percent. The region’ non-financial corporates have also driven EM Eurobond market activity, accounting for 64 percent of the $90 billion issued between January and April 2020.
Liquidity Stress Indicator
In the same month, the EM Liquidity Stress Indicator (LSI) reached the weakest level on record of 23 percent in April, well above the long-term average of 19.0 percent. Weakening liquidity points to a likely increase in defaults amid ongoing coronavirus-related disruption and market uncertainty.
The deterioration in the LSI was driven by weakening liquidity across three key sub-indicators, particularly the EM Asia Pacific LSI which is the most influential. The EM Asia Pacific LSI has gradually increased to 40 percent in April 2020 from 33.1 percent in September 2019.
Refinancing risk is also rising amid market turbulence stemming from the coronavirus, especially for lower-rated issuers with 2020 and 2021 maturities. Negative bias – ratings with negative outlooks or on review for downgrade – also climbed to a record high of 40.1 percent in April 2020, indicating more downgrades may materialize for HY companies in EM.
Moody’s expects the trailing 12-month speculative-grade default rate for EM companies will rise to between 7.8 percent and 11.2 percent by the end of 2020 from 2.2 percent in March 2020. This forecast reflects our expectation of a global recession and widening high-yield spreads this year, as virus-induced economic dislocation and financial market turmoil have intensified.
By region, the EM Latin America LSI eased slightly to 10.2 percent in April 2020 after registering a 16-month high of 11.2 percent in March. At the same time the EM Emerging Europe LSI rose to its highest level of 11.3 percent in April.
The EM LSI remains much weaker than the United States LSI and EMEA LSI, which historically have readings below 10 percent, reflecting the maturity and depth of capital markets in these regions. However, the reading remains well below the Asian LSI at 40.1 percent.
The global EM LSI covers 318 companies from 36 countries as of April 2020. The sub-indicator for EM Asia Pacific is the largest with 140 companies, followed by EM Latin America with 88 companies, EM Emerging Europe with 62, and EM Africa and the Middle East with 28.
by Denis Perevezentsev – Annalisa Di Chiara from a Moody’s Investor Services