Emerging market (EM) sovereigns are navigating recovery from the dual shocks of Covid-19 and the Russia-Ukraine war, leading to stabilizing debt levels and easing financial conditions.
However, potential policy shifts following elections and new administration formations pose risks. These evolving dynamics affect Government-Related Issuers (GRIs), potentially weakening their credit strength and the likelihood of timely government support, the rating agency said.
GRIs represent a distinct subset within the investable universe of EM debt issuers. Moody’s rates over 500 GRIs globally and has analyzed 70 in this report. These GRIs, predominantly in the energy, utility, and metals and mining sectors, show regional diversification. The average standalone credit assessment of the sampled GRIs is ba2, with an average rating uplift of two notches due to government support. Changes in government policies towards GRIs could jeopardize both standalone assessments and the uplift, it said.
Shifts in extraordinary support and default dependence can influence rating uplifts. Over 30 EM GRIs in the analysis benefit from three or more notches of rating lift, making them highly sensitive to changes in government attitudes. GRIs in EMEA exhibit higher standalone credit strength compared to those in APAC, particularly China, providing some protection if support expectations diminish.
Govt intervention
Government intervention can weaken standalone credit strength, especially in Latin America. Oil and gas companies illustrate the operational risks GRIs face under government policies. Royalties, dividends, and special taxes erode their standalone profiles. Higher levels of intervention are noted in Latin American oil and gas GRIs, while Asian GRIs face generally less intervention.
The clarity of government support capacity and willingness becomes evident as defaults approach. Eskom Holdings SOC (B2 stable) and Petroleos Mexicanos (PEMEX, B3 negative) exemplify companies with significantly declined credit quality in recent years. Eskom’s corporate family rating fell to Caa1, necessitating successive government regimes to inject recovery funds. PEMEX’s credit scenarios remain varied, heavily dependent on future government actions.
This analysis underscores the intricate relationship between sovereign credit pressures and the creditworthiness of GRIs, emphasizing the need for close monitoring of policy changes and government support mechanisms.
