EMERGING MARKETS - GLOBAL
Executive preview:
The raft of tariffs the US (Aa1 stable) administration has announced, altered and paused this year has negative credit consequences for debt issuers across emerging markets, including companies, governments and banks. Companies that rely on exports to the US are most exposed. But the wider effects of tariffs and trade uncertainty on consumer, business and financial activity will affect most emerging market entities, even as tariff deals emerge.
- Companies face direct effects of tariffs; indirect effects hit much larger swath. Companies whose earnings depend on sales of tariffed goods to the US are most directly exposed. Tariffs will reach a much bigger and varied group of debt issuers indirectly through slowing economic growth and, for many, commodity price declines, currency depreciation and investor risk aversion. Specific exposures and mitigants vary by entity.
- Chinese exported goods are main US targets. Most of the affected companies we rate in China (A1 negative) have attributes that limit tariffs' effect on earnings, including diversified geographic footprints and large domestic revenue streams. Outside of China, companies in the auto and chemicals sectors in Latin America and South and Southeast Asia are among the most exposed, although some have mitigants.
- Exports, commodity prices, risk aversion are main sovereign exposures. After China, other governments in Asia are most affected because of sizable direct exports to the US and supply chain linkages with China. Tariffs may slow their post-COVID fiscal recovery, but the pickup in intraregional trade is a partial offset. Some sovereigns in the Americas are directly exposed given their US trade linkages. Commodity-focused sovereigns would be hurt by price declines. And those with significant foreign-currency debt, weak foreign-currency reserves or weak fiscal positions are exposed to risk aversion.
- Ports sector is most exposed within infrastructure. A tariff-driven reduction in global trade would hit port revenue. But the emerging market ports we rate with US exposure – in Latin America, China, India (Baa3 stable) and Indonesia (Baa2 stable) – have mitigants. Exposure to tariffs is low for other rated infrastructure entities including airports, passenger railways, toll roads and power projects.
- Banks' exposure is through borrowers and financial markets. Weakening corporate and consumer confidence and creditworthiness in a deteriorating macroeconomic environment would reduce borrowers' appetite and capacity to take on new loans, along with their capacity to service existing loans. Additionally, tariff-driven volatility in foreign-exchange rates can cause financial losses for the many emerging market banks with more foreign-currency assets than liabilities. And if central banks reduce policy rates in response to slowing economic growth, banks' profitability would decrease.