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  • Emerging & Frontier Market Outlook Recovery, Rebalancing and Risk in an Uneven Global Environment

    JULY 2017DAVID STAPLES, MANAGING DIRECTOR, EMEA CORPORATE FINANCE

    MATT ROBINSON, ASSOCIATE MANAGING DIRECTOR, AFRICA AND MIDDLE EAST SOVEREIGNS

  • 2Emerging and Frontier Markets Outlook│ July 2017

    Six themes are shaping the global credit environment

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  • 3Emerging and Frontier Markets Outlook│ July 2017

    Poll: What is the biggest challenge facing emerging and

    frontier market credit in the coming 12 months?

    A. Rising protectionism following US

    elections

    B. Elevated corporate and household

    debt in emerging markets

    C. Slowdown in China; renewed

    pressure on commodity prices

    D. Disorderly market reaction to US

    interest rate tightening

    E. Political risks in advanced

    economies; rising social tensions in

    emerging and frontier markets

  • 4Emerging and Frontier Markets Outlook│ July 2017

    Emerging market credit environment showing signs of stabilisation after a challenging few years

    Evolution of Average Sovereign Rating Major EM Sovereign Rating Outlooks

    A v e

    ra g e

    S o

    v e

    re ig

    n R

    a ti n g

    G20 Advanced Economies Major EM Sovereigns

    0%

    20%

    40%

    60%

    80%

    100%

    S o

    v e

    re ig

    n R

    a ti n

    g O

    u tl o

    o k , %

    S h

    a re

    Negative Bias Stable Positive Bias

    Note: EM aggregates include Argentina, Brazil, Chile, China, Colombia, Czech Republic, Hungary, India, Indonesia, Korea, Malaysia, Mexico,

    Peru, Philippines, Poland, Russia, Saudi Arabia, South Africa, Thailand, Turkey, Ukraine, UAE and Venezuela. Positive (negative) bias includes

    all sovereigns on positive (negative) outlook and review for upgrade (downgrade).

    Source: Moody’s Investors Service

    Aaa

    Aa1

    Aa2

    Aa3

    A1

    A2

    A3

    Baa1

    Baa2

    Baa3

    Ba1

  • 5Emerging and Frontier Markets Outlook│ July 2017

    All major emerging markets poised for positive growth in 2017-18, but economic cycles vary significantly

    Note: Bubble Size is indicative of nominal GDP.

    Source: Moody’s Investors Service

    G-20 Emerging Market Real GDP Growth (%)

    Argentina

    Brazil

    China

    India

    Indonesia

    Mexico

    Russia

    Saudi Arabia

    South Africa

    Turkey

    -4%

    -2%

    0%

    2%

    4%

    6%

    8%

    10%

    -4% -2% 0% 2% 4% 6% 8% 10%

    P ro

    je c te

    d G

    D P

    G ro

    w th

    2 0

    1 7

    -2 0

    1 8

    ., %

    Average GDP Growth 2014-16, %

  • 6Emerging and Frontier Markets Outlook│ July 2017

    Selected Advanced Economies Central Bank Policy Rates, %

    0.00

    1.00

    2.00

    3.00

    4.00

    5.00

    6.00

    7.00

    1 Q

    0 0

    1 Q

    0 2

    1 Q

    0 4

    1 Q

    0 6

    1 Q

    0 8

    1 Q

    1 0

    1 Q

    1 2

    1 Q

    1 4

    1 Q

    1 6

    1 Q

    1 8

    US Fed ECB BoE

    Modest growth, low interest rates provide reasonably supportive backdrop for emerging market capital flows

    Note: Dotted lines reflect Moody’s baseline scenario.

    Sources: Central Banks, Moody’s Analytics

  • 7Emerging and Frontier Markets Outlook│ July 2017

    Poll: What are your expectations for global brent crude

    prices over the coming 12 months?

    A. Prices will average $70/bbl or

    higher

    B. Prices will average $60-70/bbl

    C. Prices will average $50-60/bbl

    D. Prices will average $40-50/bbl

    E. Prices will average $ 40/bbl or

    lower

  • 8Emerging and Frontier Markets Outlook│ July 2017

    Commodity prices will edge higher this year and next,

    providing support to growth, revenues and dollar liquidity

    Sources: Moody’s Investors Service, Haver Analytics

    Brent Crude Price & Moody’s Price Assumptions, $ per bbl

    0

    20

    40

    60

    80

    100

    120

    140

    160 Brent Crude, $/bbl Moody's Price Estimate Moody's Forecast Range

  • 9Emerging and Frontier Markets Outlook│ July 2017

    Adverse shifts in US policies would weaken trade and investment flows, amplify dollar liquidity challenges

    Impact of dollar appreciation

    Sub-Saharan Africa share of trade with US in GDP, %

    Source: IMF Directory of Trade Statistics

    Exports to the US as % of total exports (2010-15)

  • 10Emerging and Frontier Markets Outlook│ July 2017

    Renewed China slowdown would have significant negative spillovers for commodity producers, global growth

    Impact of a 1% Quarterly Shock to China’s Demand on Total Exports After One Year, % (GDP-

    weighted average)

    0.0

    0.1

    0.2

    0.3

    0.4

    0.5

    0.6

    0.7

    0.8

    0.9

    1.0

    Asia Commodity exporters Systemic advanced economies

    Eastern Europe All other countries

    Note: Asia = HKG, IDN, KOR, PHL, SGP, THA. Commodity exporters = AUS, BRA, CHL, COL, RUS, ZAF. Eastern Europe = CZE, EST, HUN,

    LTU, LVA, POL, SVK, SVN, TUR. Systemic advanced economies = DEU, JPN, USA. All other countries = ARG, AUT, BEL, CAN, CHE, DNK, ESP,

    FRA, FIN, GBR, GRC, ISR, IRL, ISL, ITA, LUX, MEX, NLD, NOR, NZL, PRT, SWE.

    Source: IMF World Economic Outlook – October 2016.

  • 11Emerging and Frontier Markets Outlook│ July 2017

    Rapid increase in EM household and corporate sector debt represents a risk to financial market stability

    Note: Includes debt of households, non-financial corporates, government and financial companies.

    Sources: Moody’s Investors Service, Institute of International of Finance

    Emerging Market Household and Corporate Debt, % of GDP (Q316) and 5-Year Change (pp)

    Argentina

    Brazil

    Chile

    China

    Czech Rep.

    Hungary

    India

    Indonesia

    Malaysia

    Mexico

    Poland

    Russia Saudi Arabia

    South Africa

    Thailand

    Turkey

    0

    50

    100

    150

    200

    250

    -40 -20 0 20 40 60 80

    P ri v a

    te S

    e c to

    r D

    e b

    t S

    to c k , %

    o f

    G D

    P (

    3 Q

    1 6

    )

    5-Year Change, percentage points

  • 12Emerging and Frontier Markets Outlook│ July 2017

    Risks slanted to the downside in Sub-Saharan Africa

    Negative outlooks dominate after

    downgrades in 2016

    » Weakened growth prospects,

    especially following commodity

    price slump

    » Very limited fiscal or monetary

    space, historically high debt loads

    and service costs

    » High vulnerability to external

    shocks, given growth in external,

    non-concessional debt, generally

    shallow domestic debt markets

    » Simmering social tensions amid

    congested election calendar

    Distribution of Moody’s Sovereign Ratings in Sub-Saharan Africa

  • 13Emerging and Frontier Markets Outlook│ July 2017

    Key messages: Uneven global credit conditions persist

    But significant variation in emerging and frontier

    market ability to weather global challenges

    US trade policy, a renewed slowdown in China,

    rapid growth in EM debt are key downside risks

    Sub-Saharan Africa faces its own challenges amid

    subdued growth, weak commodity prices, liquidity

    constraints and social tensions

    2

    3

    4

    A stabilising macro environment will support

    emerging and frontier market credit in 20171

  • 15Emerging and Frontier Markets Outlook│ July 2017

    © 2017 Moody’s Corporation, Moody’s Investors Service, Inc., Moody’s Analytics, Inc. and/or their licensors

    and affiliates (collectively, “MOODY’S”). All rights reserved.

    CREDIT RATINGS ISSUED BY MOODY'S INVESTORS SERVICE, INC. AND ITS RATINGS AFFILIATES

    (“MIS”) ARE MOODY’S CURRENT OPINIONS OF THE RELATIVE FUTURE CREDIT RISK OF ENTITIES,

    CREDIT COMMITMENTS, OR DEBT OR DEBT-LIKE SECURITIES, AND MOODY’S PUBLICATIONS MAY

    INCLUDE MOODY’S CURRENT OPINIONS OF THE RELATIVE FUTURE CREDIT RISK OF ENTITIES,

    CREDIT COMMITMENTS, OR DEBT OR DEBT-LIKE SECURITIES. MOODY’S DEFINES CREDIT RISK AS

    THE RISK THAT AN ENTITY MAY NOT MEET ITS CONTRACTUAL, FINANCIAL OBLIGATIONS AS THEY

    COME DUE AND ANY ESTIMATED FINANCIAL LOSS IN THE EVENT OF DEFAULT. CREDIT RATINGS

    DO NOT ADDRESS ANY OTHER RISK, INCLUDING BUT NOT LIMITED TO: LIQUIDITY RISK, MARKET

    VALUE RISK, OR PRICE VOLATILITY. CREDIT RATINGS AND MOODY’S OPINIONS INCLUDED IN

    MOODY’S PUBLICATIONS ARE NOT STATEMENTS OF CURRENT OR HISTORICAL FACT. MOODY’S

    PUBLICATIONS M

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