LONDON (Reuters) – Emerging economies will continue to suffer from the spillover of economic problems in the U.S., which are restricting their market access and pushing up financing costs, a Moody’s report said on Thursday.
A combination of U.S. monetary policy, the banking system stress and “any consequences of the debt ceiling impasse” contribute to weak credit conditions in emerging markets, the credit agency said, adding that the world’s biggest economy is set for a mild recession in the second half of the year.
The White House and congressional Republicans are expected to resume negotiations on a deal to raise the government’s $31.4 trillion debt ceiling on Thursday, with as little as a week remaining until a potential default.
“The focus of many market participants has returned to the global economic growth outlook and the future path for U.S. interest rates,” the report, led by analyst Vittoria Zoli, said. “Risks to our baseline include whether and how quickly U.S. inflation subsides and the Fed’s response to it.”
Moody’s expects growth to decline “in most emerging markets this year.” Commodity exporters in the Middle East, Africa and Latin America are set to suffer the most, as commodity prices decline due to recession fears and excess supply concerns.
“The increase in commodity prices (with the exception of iron ore) since China’s reopening has been relatively muted if not negative,” the report said.
The credit agency, which rates sovereign debt in 105 emerging markets, added that frontier economies are at a higher risk of default as they are unable to tap international markets.
But it also pointed out that there is a “degree of stabilization,” with the rate of sovereign downgrades relative to upgrades slowing.
Moody’s recently downgraded Bolivia’s rating to Caa1 from B2, Pakistan to Caa3 from Caa1 and changed its outlook to stable from negative, and Kenya’s rating to B3 from B2. Additionally, it placed Egypt’s outlook under review for possible downgrade from stable.
(Reporting by Jorgelina do Rosario, editing by Karin Strohecker and Sharon Singleton)