Emerging market credit quality to plateau, says S&P

Standard & Poor's released a report yesterday, which stated that emerging market sovereign credit quality has peaked and will plateau as credit markets amongst industrialised economies remain turbulent and the growth of world trade is uncertain.

In the past 12 months, emerging market sovereigns have not defaulted, and default rates will continue to be modest, especially for those at and above category ‘B’. In many of these sovereigns, external positions have improved and financial systems strengthened, diffusing their vulnerability to debt dynamics and facilitating reforms for sustainable growth.

However, S&P reports that these positive developments are mediated by disconcerting situations both at the micro and macro level. Already, political situations have prompted credit rating downgrades in four sovereigns, while eight retain negative outlooks, and only two – Poland and the Slovak Republic – sustain positive outlooks. Slowing growth in 32 of the 43 emerging economies will be compounded by the worsening of their current accounts and increases in consumer price averages. While the future of emerging market credit remains nebulous, the trend of improving credit fundamentals appears to be subdued.