Emerging Markets Real Estate Issuers Stand Their Ground

Home sales in emerging markets will continue to decrease in 2023, particularly in mainland China. High mortgage rates are hitting both households and homebuilders.

However, favorable government policies (Brazil) and supportive banking sectors (Indonesia) are keeping credit ratings resilient.

We anticipate real estate issuers in emerging markets will thrive, albeit to varying degrees.

Domestic Demand Is Holding Up

Recent Q2 GDP prints indicate ongoing resilience among key emerging markets (EMs), particularly with regards to domestic demand. EM Asia and parts of LatAm have performed strongly in Q2, given continued growth in household consumption and fixed investment. EM EMEA is the only EM region in which most key economies have recorded negative sequential growth, as weak external demand has taken a toll, especially on those countries that are highly exposed to the eurozone.

Economic growth in China and the eurozone is waning, with negative spillover effects for several EMs. High-frequency data in China point to moderating growth in Q3 as retail sales and exports have been deteriorating over the last few months. However, as activity and credit are still growing (albeit at slower rates), a sharp deceleration in growth is unlikely. At the same time, EM EMEA exports are likely to be subdued, as incoming high-frequency data and purchasing managers’ indices (PMIs) in the eurozone, particularly in Germany, remain lackluster.

Spreads will be vulnerable to volatile external conditions. The potential for an additional rate hike by the Federal Reserve, at a time when several EMs are lowering their interest rates, along with disappointing growth in China and the eurozone, could encourage capital outflows and pressure exchange rates against the dollar. In addition, geopolitical risks continue to complicate the outlook.

Tech Disruption In Retail Banking: Financial Inclusion In Mexico Will Remain Low Despite Digitalization

S&P Global Ratings believes that Mexico's large banks are outpacing smaller players in the digital race. Large banks' strong presence in the country, well-diversified business and funding profiles, and sound profitability enable them to invest in their digital infrastructure to cope with tech disruption. On the other hand, small and medium-size banks have a lower base of business, revenue, and funding diversification, and they're currently facing earnings pressure amid high interest rates. As a result, they're struggling to make the digital investments that are needed. The digitalization of banking could open the door to future consolidation within the sector.

EMEA Emerging Market Sovereign Rating Trends Midyear 2023: Bright Spots Appear

Credit conditions for the 55 rated emerging market sovereigns in Europe, the Middle East, and Africa (EMEA) are stabilizing.

This is thanks to improved visibility on the U.S. rate-tightening cycle; generally prudent monetary and fiscal policy settings; and a reversal of energy price shocks.

However, there is no room for complacency, as fiscal space is in short supply and the cost of new debt is higher than it was two years ago.

At the same time, elevated inflation, above-average debt burdens relative to tax collection, and constrained coverage of external payments by net reserves reflect the legacy of the pandemic and the repercussions of the Russia-Ukraine war.

Corporate India Is On A Stronger Credit Footing

The operating outlook is positive across rated India sectors, building on two years of robust earnings growth.

Leverage will continue improving, despite higher capex.

Strong onshore liquidity mitigates the impact of tougher external-funding conditions.

Sub-Saharan Africa's Fading Tailwinds And Missed Opportunities

Sub-Saharan Africa's (SSA) growth will weaken this year before likely rebounding in 2024, albeit with large variations. Sustaining rapid growth will be challenging due to weaker global expansion and a reluctance to invest due to high interest rates.

Selected SSA sovereigns will continue to grapple with structural weaknesses. But the end of the pandemic, the reopening of tourism and services sectors, and falling food and fuel prices should support growth and bring some fiscal relief, although we see limited upside for ratings absent relevant structural reforms.

Long term corporate growth has slowed due to persistent elevated inflation and interest rates (exacerbated by softer non-oil commodity prices), which have weighed on margins and discouraged capital investment. Limited debt-issuance needs offset the impact of risk averse capital markets, for now

Tighter credit conditions due to inflationary pressures and interest rates will restrict lending and exacerbate already elevated credit risk at Sub-Sahara African banks, leading to somewhat higher credit losses.