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Emerging Markets Credit Ratings: Strength And Struggles Amid Global Shocks

The global economy has faced unprecedented shocks over the past three years, the most significant being the COVID-19 pandemic and the Russia-Ukraine conflict.   From a credit perspective, S&P Global Ratings has examined which emerging market geographies and sectors were more affected during this time of global stress, with a focus on two periods: period one following COVID-19's initial outbreak (March 2020-February 2022); and period two starting with the Russia-Ukraine conflict (February 2022-January 2023). Latin America was the region hardest hit in period one (see chart 1), with negative rating actions overcoming positive ones by 105, and utilities and banks contributing about 45% to the negative credit trend. Greater China has been more affected in period two, compared with Eastern Europe, the Middle East, and Africa (EEMEA). For China, this impact is not specifically related to the start of the Russia-Ukraine conflict, although the timing coincides; rather, it is the outcome of a severely strained property market by changing regulation in China, which alone accounted for 60% of the downward credit rating movement. Moreover, credit ratings exhibited state-dependency: some of those worst affected during period one, such as utilities and banks, proved best in class in period two (see chart 2).

Chart 1


Chart 2


Chart 3


Chart 4


Ratings in EMs on average transitioned to higher credit quality between March 2020 and January 2023 (see chart 3). However, the number of rated issuers shrank, with 516 rated issuers becoming 438 in almost three years, because a succession of rating withdrawals followed downgrades or defaults.

Chart 5


Chart 6a


Chart 6b


Chart 6c


Chart 6d


Data gives a clear indication of the most affected and most resilient sectors, as follows.

Top Affected Sectors

Period one (March 2020-February 2022)

Utilities  Utilities accounted for 17% of the overall negative actions in EMs in period one, with most rating actions concentrated in Latin America. Within that region, 50% of the downward movements stem from sovereign rating actions, indicating that in terms of idiosyncratic credit strength, utilities companies withstood the COVID-19 shock, but they were affected by their strong link with sovereigns.

Banks   More than 60% of EM banking sector ratings were affected by sovereign actions during period one, while the remaining 40% suffered from worsening asset quality, credit losses, and higher nonperforming loan (NPL) levels. This stemmed largely from weaknesses present before the pandemic, or significant exposure to vulnerable sectors, such as small-to-midsize enterprises (SMEs) (as in the case of KASIKORNBANK) or the real estate sector (China Bohai Bank Co., Ltd.)

Table 1


Nonbank financial institutions (NBFIs)  Changes in our Banking Industry Country Risk Assessment (BICRA) scores for Mexico in 2020 and Chilean economic risk trend triggered downward rating actions in NBFIs. Moreover, economic conditions weakening in India and low barriers to entry in distressed asset management sector in China were the main triggers.

Transportation  Air transportation suffered mainly in Latin America, because of COVID-19 imposed travel restrictions.

Period two (February 2022-January 2023)

Real estate  Real estate has in China has seen the greatest impact since 2020, because the government tightened the regulations on developers' leverage, which had a big impact on those developers with high leverage and a high asset turnover business model. In the second half of 2021, the Chinese government tightened the escrow rule compliance requirements on presale proceeds, and with real estate developers' cash accessibility being dampened, this pushed many to the edge of default. Moreover, heterogeneous compliance with the rules created some uncertainty among investors, who became increasingly reluctant to give money to issuers experiencing strained circumstances. The liquidity crunch for developers has deepened since the second half of 2021, spurring investors to brace for liquidity and even insolvency risk. In addition, cash scarcity has been a problem for numerous reasons, including falling sales, the recent halt to nearly all financing channels, and cash trapped in escrow accounts to ensure developers can deliver pre-sold units.

Consumer products   Issuers have been severely affected by raw material price inflation, supply chain complexities, the restriction of Russian activity (particularly EEMEA companies), and refinancing concerns, especially for companies already embedded in a precarious liquidity position.

NBFIs  Monetary tightening contributed to scarcer and more expensive liquidity and increasing refinancing risk, which culminated in recent defaults in Mexico, where poor financial management policies were uncovered. Moreover, we lowered the anchor for Mexican NBFIs on increasing funding and economic risks (compared with banks, NBFIs have a lack of access to funding from central banks, lower regulatory oversight, and more competitive risk than banks because of the lower cost of financing). Finally, the sector suffered from the slump in the Chinese property sector.

Pockets Of Resilience

Period one

Metals and mining  Metals and mining companies have benefitted from higher raw material prices.

Period two

Banks  Of 13 positive rating actions on banks in the second period, nine followed sovereign actions on improved macroeconomic conditions. Rating actions that stemmed from idiosyncratic credit factors resulted from improved margins following higher interest rates, improved asset quality, better RAC ratios, and easing capital pressures.

Utilities  Again, movements were mainly sovereign-related. In addition, higher energy demand and prices played a prominent role in the utilities sector.

A Look Ahead

Financial data of the most affected sectors throughout periods one and two suggest that real estate is the sector most at risk in terms of liquidity and debt exposure, with funds from operations (FFO) to debt expected to recover from 2022 levels in 2023-2024, but still at lower levels compared with 2019. We expect debt to EBITDA to be 50% higher than 2019 levels through 2022-2024. Nonetheless, we expect that the recent surge in interest rates and weaker economic activity will put pressure on capital-intensive sectors such as retail and airline.

Chart 7a


Chart 7b


Chart 7c


Chart 7d


Table 2

Median financial ratios
2019 2020 2021 2022e 2023f 2024f
S&P Global Ratings RAC ratio after diversification (%) 7.56 7.38 7.11 7.165 7.33 7.175
Return on equity (%) 11.02 10.05 10.73 10.925 11.42 11.15
Gross nonperforming assets/(customer loans + other real estate owned) (%) 2.93 2.78 2.65 2.96 2.77 2.945
New loan loss provisions/average customer loans (%) 1.48 1.77 1.15 1.04 1.03 0.98
Loan loss reserves/gross nonperforming assets (%) 107.85 124.6 122.36 122.21 129.42 123.26
Stable funding ratio (%) 108.47 114.17 112.6 -- -- --
Broad liquid assets/short-term wholesale funding (x) 2.01 2.37 2.63 -- -- --
Data as of Jan 31, 2023. e--Estimate. f--Forecast. Source: S&P Global Ratings Credit Research & Insights.

We expect China's residential property market to follow an L-shaped recovery, possibly in the second half of 2023. State-owned enterprises (SOEs) will gain market share, because they were more active in land acquisitions and had better access to funding in 2022. The rise of SOE developers will transform the sector into a steadier market. This is because such developers will generally use leverage less aggressively than their privately owned counterparts. While the sector has shown initial signs of recovery in February 2023 thanks to supportive government policies, uncertainty lingers regarding homebuyers' confidence, the length of the supportive policy environment, and the adaptation of developers to a lower-profit market. Net outlook bias (the percentage of issuers with a positive bias minus the percentage of issuers with a negative bias) as of January 2023 is negative 24%, recovering from February 2022 levels, but still higher than March 2020's negative 10% (see chart 9b).

In the banking sector, profitability will continue to improve in commodity-exporting countries, thanks to normalizing cost of risk and higher net interest margins. At the same time, we expect some pressure on asset quality indicators, as lower economic growth and higher interest rates weigh on retail and corporate creditworthiness. All in all, we believe that the visible risks are reflected in the current ratings.

Past rating actions shed a light on how pressures may affect the credit ratings of banks in EMs in the future: hitting their outlook/CreditWatch status (OL/CW) and issuer credit rating (ICRs) and not necessarily their stand-alone credit profile (SACP). Indeed, throughout both periods under consideration, 70% of rating actions on EM banks did not involve an SACP change, but did affect the OL/CW and ICR.

Chart 8


Table 3


In 2023, consumer products companies will likely benefit from China's economic reopening, while weaker economic conditions amid a stickier inflation trend will certainly dent consumer confidence and erode corporate margins.

EEMEA utilities' future will be dependent on gas and power prices, which will likely be volatile, with most capex targeted toward energy transition. Credit profiles in the sector will be strained by inflation and high refinancing costs.

Our forward-looking indicators portray a progressive stabilization of credit ratings, with most of the rating imbalances (net outlook bias) present in February 2022 that have been absorbed, despite some pressure still present on the lower end of our rated spectrum (see chart 9a).

As noted above, credit quality in EMs is highly linked to sovereign ratings. Many bank credit rating are capped by their respective sovereign ratings, with BICRA scores, particularly economic risk, likely to follow a sovereign rating action. Meanwhile, utilities' proximity to government and reliance on a favorable energy policy framework significantly affects ratings in that sector.

In terms of regions, the highest level of risk is tilted toward Argentina, Peru, and Turkiye (with nine, nine, and 10 corporate rated issuers, respectively), with sovereign ratings currently on a negative outlook.

More generally, corporates' internal and external mitigants, policy support, and external dependency on developed markets will be the key factors in shaping EMs' corporate credit resilience.

Chart 9a


Chart 9b


Table 4


Emerging markets comprises:

  • Latin America (LATAM): Argentina, Brazil, Chile, Colombia, Peru, Mexico.
  • Emerging Asia (EMASIA): India, Indonesia, Malaysia, Philippines, Thailand, Vietnam.
  • Eastern Europe, Middle East, and Africa (EEMEA): Poland, Saudi Arabia, South Africa, Turkiye.
  • Greater China: China, Hong Kong, Macau, Taiwan, red chip companies (issuers headquartered in Greater China but incorporated elsewhere).

Related Research

Editing: Madeleine Corcoran.

This report does not constitute a rating action.

Primary Credit Analyst:Luca Rossi, Paris +33 6 2518 9258;
Secondary Contacts:Jose M Perez-Gorozpe, Madrid +34 914233212;
Lawrence Lu, CFA, Hong Kong + 85225333517;
Mohamed Damak, Dubai + 97143727153;
Alfredo E Calvo, Mexico City + 52 55 5081 4436;

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