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13 May 2018
New York, May 13, 2018 -- Sovereigns with relatively short average maturity of debt and weak debt
affordability are generally the most exposed to a larger than expected
rise in borrowing costs, Moody's Investors Service said in
a report today.
Moody's central forecast is that the anticipated tightening of global
financing conditions will be gradual. However, financing
conditions could tighten more rapidly than Moody's currently assumes,
either globally or for specific sovereigns. In a study of 125 rated
sovereigns, Moody's analysed the sensitivity of sovereign
fiscal metrics to two hypothetical interest rate shocks, one moderate
and gradual and one severe and more immediate. Both shocks are
assumed to be sustained over four years.
Moody's concludes that a moderate shock would generally be manageable,
with limited impact on sovereigns' debt affordability and debt burdens
other than for those which already exhibit very low fiscal strength.
A severe shock would pressure a broader set of ratings.
"The sovereigns most vulnerable to an interest rate shock are generally
low rated, with shorter maturities and weak debt affordability,"
said Elisa Parisi-Capone, a Moody's Vice President
-- Senior Analyst and co-author of the report. "In
our view, exposure to a shift in financing conditions is highest
for Lebanon (B3 stable), Egypt (B3 stable), Pakistan (B3 stable),
Bahrain (B1 negative) and Mongolia (B3 stable). Sri Lanka (B1 negative)
and Jordan (B1 stable) are also highly exposed."
At the regional level, Latin America, the Caribbean and Sub-Saharan
Africa are the most exposed regions to shocks through weaker debt affordability.
For Sub-Saharan Africa, a sudden and sharp rise in the cost
of borrowing would add to refinancing pressures ahead of large debt maturities
due early next decade.
Large emerging markets such as Argentina or Indonesia are not amongst
the sovereigns most exposed to the impact on fiscal metrics of a tightening
in financing conditions, generally because they benefit from a long
average maturity of government debt that reduces the credit impact of
a sharp rise in interest rates.
Although government debt has generally stabilized, it is much higher
than at the start of the previous global tightening cycle in 2004-2006,
reducing fiscal flexibility in the face of a potential financing shock.
A number of sovereigns - in particular lower income countries -
have relatively high debt burdens, eroded revenue bases after the
commodity price shocks, and an untested capacity to refinance sizable
maturities in an environment of tighter financing conditions.
On average for the 30 most exposed sovereigns, interest payments
would absorb an additional 3% of revenue by 2021 in the moderate
shock, compared with no change in the baseline. With the
possible exceptions of sovereigns which already have very low fiscal strength,
current ratings are consistent with an impact of that magnitude.
In the severe shock, all the most exposed emerging market and frontier
market sovereigns would see fiscal strength weaken. Absent a policy
response that effectively mitigated the erosion of fiscal strength,
these shifts would strain ratings, even for sovereigns we already
assess with the lowest fiscal strength.
Besides higher interest rates, tightening financing conditions would
also involve weakening exchange rates where exchange rates are flexible.
This would exacerbate the negative impact of the shock on fiscal metrics
through a higher foreign currency debt burden.
In countries with tightly managed exchange rates, central banks
would have very limited flexibility to offset a global financing conditions
shock. If central banks needed to support the exchange rate to
preserve the current managed arrangements, foreign exchange reserves
buffers would erode and external vulnerability would rise.
The report, "Sovereigns -- Global, Weakest MENA and APAC
sovereigns would be most sensitive to an interest rate shock",
is now available on www.moodys.com. Moody's subscribers
can access this report via the link at the end of this press release.
The research is an update to the markets and does not constitute a rating
Subscribers can access the report at: https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_1113266
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