July 2, 2023/Source: S&P Global Ratings

Credit conditions in emerging markets (EMs) show some improvement as inflation cools down, but economic activity is weakening, and the lagged effects of tight monetary policy are surfacing, according to S&P Global Ratings’ report published, “Credit Conditions Emerging Markets Q3 2023: Inflation Peaked, Risks Remain“. 

Banks and domestic capital markets have provided critical financing, somewhat offsetting the tight financing conditions abroad. Corporations remain resilient as cost pass-through continues. Challenges remain, as activity slows down, while challenging financing access and high rates will linger longer than initially expected.

Risk trends for EMs have stabilized, though tight financing conditions continue clouding the outlook for EM issuers. Lower-rated entities continue to encounter difficulties in accessing capital markets, and recent refinancing show’s a steep increase in rates. We see two threats ahead: on the one hand, the Federal Reserve could further increase its rates if inflation doesn’t cool down; on the other hand, we now expect that higher interest rates will linger for longer, which will be challenging for debt-laden businesses.

We expect that the lagged effect of the rapid and significant monetary tightening, along with enduring high prices, will continue influencing EM rating trends. Lower-rated entities will remain vulnerable to these conditions, and we expect negative rating actions to dominate.