Moody's: Frontier markets show divergent credit paths

Moody's Investors Service says that frontier markets (FMs) will show differentiated credit exposure to rising interest rates globally, just as they demonstrated divergent shock absorption capacities during the commodity price slump of 2014-2015.

In addition, the debt levels of FM sovereigns will remain elevated and they will continue to spend more on debt service costs in the next year.

"Benign global liquidity conditions have permitted some FMs to raise commercial USD sovereign debt, at relatively favorable rates," says Anne Van Praagh, a Moody's Managing Director. "One quarter of FMs had issued new debt on commercial terms as of August 2017. Meanwhile, some FMs are relying on finance and investment from China and less on multilateral concessional debt."

"Looking ahead, as global liquidity conditions evolve, elevated debt service costs and liquidity risks are key credit challenges for FMs," she says. "The ability of individual FMs to handle rising interest rates and rollover of commercial debt is differentiated. Vulnerabilities are highest for those countries where high leverage combines with a constrained ability by domestic policymakers to ease monetary policy and preserve fiscal flexibility."

Vulnerability to rising global interest rates is highest in Mongolia (Caa1 stable), Mozambique (Caa3 negative) and Egypt (B3 stable) with these sovereigns demonstrating limited available fiscal and monetary space and buffers vary across FMs.

Bangladesh (Ba3 stable), Nigeria (B1 stable), and Vietnam (B1 positive), in contrast, are better positioned to withstand higher interest rates.

Moody's says that the strength of institutions determines a sovereign's ability to counter negative shocks, such as a rise in global capital costs. In many FMs, weak institutions constrain their ability to buffer against shocks.

In addition, direct external vulnerability risks are high for around one quarter of FM sovereigns that Moody's rates. Reliance on foreign capital to fund current account deficits heightens the vulnerability of these sovereigns to capital outflows or lower inflows that can exacerbate difficulties in meeting current account and external debt payment obligations.

These external vulnerabilities are highest in Tajikistan (B3 stable), Belarus (Caa1 stable), Mongolia, and Georgia (Ba2 stable).

Moody's rates 36 FM countries, most of which carry ratings in the B1-B3 range. Of the 36, downgrades have outnumbered upgrades and none have climbed to investment grade since their sovereign rating was initiated.

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