Frontier Markets and Mena Oil Importers Most Exposed to Funding Shock, Says Moody’s

Low-rated frontier markets and oil-importing countries in the Middle East and North Africa (MENA) region are most exposed to a prolonged funding shock amid tighter global financial conditions and monetary policy in because of Russia’s war in Ukraine, Moody’s Investors Service said. .

Borrowing costs are expected to rise sharply while currency depreciation could increase the debt burden of countries with high foreign currency exposure, the rating agency said in a report.

Capital outflows in a context of tighter global financial conditions would weaken their external stability.

“A spike in borrowing costs would weaken debt affordability for Egypt, Pakistan, Ghana and Jordan, all of which already have high interest bills or large borrowing needs. Sri Lanka’s debt affordability, already by far the lowest, would weaken even further,” Moody’s said.

“Currency depreciation would increase the debt burden for those with high foreign currency exposure. Among sovereigns without stable pegs, Suriname, Laos, and Argentina would experience the largest debt increases in our stress scenario of a 20% depreciation shock.

Moody’s also said capital outflows would weaken external stability in countries like Sri Lanka, Belarus and Ethiopia, where reserve levels are already low relative to incoming external debt payments or imports or as a percentage of gross domestic product.

Macroeconomic uncertainties are rising globally after the Russian-Ukrainian war, with commodity prices hitting record highs in recent weeks, fueling inflation around the world.

The International Monetary Fund has lowered its 2022 growth forecast for the global economy as the war in Ukraine has severely weighed on the economic outlook and rising inflation threatens to derail momentum.

The IMF now forecasts global growth of 3.6% in 2022 and 2023, revised down by 0.8 percentage point and 0.2 percentage point, respectively, from its January forecast.

The United States, the world’s largest economy, is also tightening monetary policy and considering raising interest rates by half a point to bring inflation under control, according to Federal Reserve Chairman Jerome Powell.

“A 200 basis point shock to marginal borrowing costs would weaken EM and frontier debt affordability metrics the most, with their median interest/income rising 0.7 percentage points from the reference without shock. The median impact on advanced economies is less than 0.5 percentage points,” Moody’s said.

At the country level, sovereigns with an already high interest bill and large gross borrowing needs are most exposed to a 200 basis point marginal borrowing cost shock, including Sri Lanka, Egypt , Pakistan and Ghana, the rating agency said.

Advanced economies such as the United States and Japan are also exposed to higher borrowing costs due to their high refinancing needs.

However, the interest-to-income bill remains below 10 in both cases, indicating their low cost of debt and large funding pool, he said.

Sri Lanka is facing its worst financial crisis in more than 70 years amid low foreign currency reserves. It is seeking funding from the IMF and other countries like India and China to deal with the crisis.

The Covid-19 crisis has hit the country hard, leading to loss of tourism revenue and strict closures. Significant tax cuts in 2019 and the effects of the Covid-19 pandemic led to budget deficits of 11.4% and 12.8% of GDP in 2021 and 2020, respectively, raising public debt well above above 100% of GDP.

Egypt, the most populous country in the Arab world, is also suffering from rising import costs and energy prices, which have affected foreign currency reserves amid the Russian-Ukrainian conflict.

The North African country’s annual urban inflation rate hit 8.8% in February, the fastest rate in about three years, due to soaring food prices.

To ease economic shocks caused by supply chain disruptions and bolster foreign currency reserves, Egypt recently introduced a 130 billion Egyptian pound ($7.1 billion) relief package, raised interest rates interest, allowed its currency to weaken sharply and asked for support from the IMF.

The country’s Gulf allies have also pledged up to $22 billion to help the country deal with the effects of the war in Ukraine.

“The depreciation shock is more relevant for frontier and emerging markets than for advanced economies because the latter are mostly financed in local currency,” Moody’s said.

“The exposure of emerging and frontier markets to adverse valuation effects has actually increased over the past four years, given the further rise in the median share of foreign currency denominated debt.”

Among sovereign states without durable pegged exchange rates, Suriname is expected to experience the largest increase in its debt-to-GDP ratio after a 20% depreciation shock, given its high initial stock of debt and large share of foreign exchange. foreign, which amounted to more than 70%. percent in 2021, followed by Laos and Argentina.

Moody’s also said a drawdown on reserves would weaken the coverage of upcoming external debt service payments in the Mena region’s border and oil-importing markets.

“An unforeseen drawdown on the reserves of 2% of [the] GDP would increase balance of payments risks for Sri Lanka, Belarus, Bahrain and Ethiopia, most given their already low foreign exchange reserves, measured in months of import cover,” he said. .

Updated: April 23, 2022, 04:00

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