In a report on sovereign bonds released August 23, Fitch Ratings concludes that healthy amounts of external liquidity mean emerging market sovereign bonds are, by and large, well placed to ride out the disruption in global credit markets, at least in the near term.
The ongoing turmoil in global credit and money markets has spilled over into emerging markets, causing sovereign bond spreads and some domestic bond markets to suffer. Even so, Fitch says it has refrained from taking any negative credit rating actions for emerging-market sovereigns because although asset prices have fallen sharply, Fitch judges that sovereign credit fundamentals are sufficiently robust to withstand the current volatility in global financial markets.
"With the switch to local capital markets for fiscal funding and healthier sovereign external balance sheets, Fitch estimates that emerging-market sovereigns only need to raise a further $7bn from international capital markets over the remainder of 2007," it says. "This additional borrowing will be from Emerging Europe, including Turkey, where external liquidity pressures are more significant than elsewhere.
Fitch says private sector (including quasi-sovereign) external debt maturing over the next 17 months is estimated to total $380bn (compared with just $43bn for sovereigns), much of which has been borrowed by entities with ratings lower than their sovereign. With international reserve assets exceeding $3.2 trillion, emerging-market central banks are well placed to supply foreign currency in the event that emerging-market private sector borrowers face a sustained lock-out from international capital markets.
However, Fitch warns that record flows of capital into emerging-market economies in recent years - gross financial market flows to emerging markets exceeded $480bn in 2006 - suggest potential for substantial outflows of capital that could pressure local financial markets and currencies if the "flight to safety" were to intensify.
"In this current environment, there is even greater onus on policymakers in emerging markets to ensure they respond in a timely and appropriate manner as events unfold. While exchange rate flexibility and reserve cover may have given policy makers more latitude than in previous crisis periods, greater foreign participation in local asset markets has raised the premium on effective monetary policy management," it says.
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