Few frontier markets will see credit quality improve: Moody’s

Moody’s Investors Service said that while the potential for economic expansion in frontier markets is strong when compared to emerging markets; only a select group of these countries is well placed for credit improvements.

The analysis is contained in its just-released report titled “Sovereigns - Frontier Markets, A Challenging Climb to Investment Grade”.

Moody’s report points out that none of the 29 rated frontier-market sovereigns in the study has seen dramatic credit improvements over the past 10 years.

For example, the current rating on just one sovereign, Bolivia (Ba3 stable), is higher than the initial rating assigned to it by Moody’s.

By contrast, nearly half are currently ranked below their original ratings, and seven carry negative outlooks versus three with positive outlooks.

Moody’s defines frontier markets as sub-investment grade countries that rely primarily on concessional financing to fund their external public debt needs.

Frontier markets typically exhibit common credit strengths, including stronger growth performance, due to their abundant natural resources, trade openness, and young populations.

At the same time, they share credit weaknesses stemming from rising debt burdens, high external financing needs, and weak institutions.

Looking ahead, only a few sovereigns appear well-positioned for credit improvements against a backdrop of rising interest rates, volatile capital flows, and slowing growth in China.

Lower commodity prices and, in some cases, geopolitical tensions, will dampen export earnings and foreign investment. These factors will weigh on growth and inflate government debt burdens relative to GDP for most frontier markets.

Moody’s report says that governments that have addressed fiscal imbalances, strengthened their institutions to create more stable and predictable operating environments stand to see credit quality advance. The ability to attract foreign direct investment will also be important to reliably fund external financing needs. In addition, countries that have export baskets with less elastic demand profiles will maintain strong growth.
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