S&P Global Ratings assessed the resilience to external shocks of 22 emerging market (EM) sovereigns with high levels of government debt, such as a sudden loss of foreign financing due to tightening global liquidity. It noted that rising U.S. interest rates and the recent global trade tensions have raised concerns about potential liquidity challenges spreading across EMs. However, it indicated that EM sovereigns have become more resilient to external risks, and did not expect a high risk of contagion from the recent market turmoil. It considered that EM sovereigns that have fiscal and financial buffers, and that have developed a credible and predictable institutional stance, have the capacity to mitigate adverse shocks. In contrast, it considered that sovereigns that lack such credit qualities and that did not undertake adequate reforms would have to make hard policy adjustments to avoid a crisis or a default in the event of a sudden loss of foreign financing. 

In addition, S&P projected that 14 out of the 22 EM sovereigns will run a current account deficit in 2018. But it considered that most EM sovereigns have other credit strengths that provide them with financial and policy flexibility to manage external challenges. It said that countries with a net external debt position and a current account deficit, such as Argentina, Egypt and Turkey, are more vulnerable to adverse external developments; while EM economies with favorable external positions, such as China, Russia and Saudi Arabia, are more insulated against external shocks. Further, it noted that all EM sovereigns with a current account deficit in 2018 have either a floating or a free-floating exchange rate, which would help them absorb external shocks. However, it indicated that any sharp movement in the exchange rate could have significant negative repercussions, especially in economies with a weak or ineffective monetary policy, small domestic capital markets, and high reliance on external debt.
Source: S&P Global Ratings