- Recent ratings convergence between emerging and developed nations reflects the former’s faster growth, more resilient public finances and less leveraged financial systems relative to the richer countries.
- A number of emerging nations have seen their currencies appreciate strongly as high growth and attractive valuations coupled with very loose monetary conditions in core developed markets have caused massive capital inflows to emerging markets.
- Governments and central bank authorities have responded very differently depending on their policy priorities and their ability to intervene aggressively and effectively in the market, ranging from Chile’s hands-off approach to the adoption of targeted capital controls in Brazil and Thailand.
- While we don’t see any immediate ratings impact from these actions or the developments behind them, we will be monitoring how countries adjust to this changing international landscape and its impact on economic growth, fiscal, and debt dynamics over the medium to long term.
Countries throughout the emerging market world have for the most part shown enormous economic resilience throughout the global financial crisis and recovered strongly since the end of last year.
Generally speaking, these countries have been growing faster than developed nations on average and their relative credit positions have improved, leading to net ratings upgrades everywhere (except in Europe). Normally during any given period of time some countries are upgraded while others are downgraded, and so some ratings rise while others are lowered, often with some regional bias due to idiosyncratic events.
The net number, or the net notch change, gives us a sense of the overall ratings direction in each region. Latin America’s improvement over the last three years, followed by Middle East, African and Asian credits, is clear. Europe’s ratings, on the other hand, have been hit hard by the crisis.
Capital Inflows
But this improvement has come at a growing price. A combination of loose monetary policy in the largest advanced countries and improved economic prospects in developed nations has caused capital to flow into emerging markets at an increasingly aggressive pace and their currencies to appreciate.
Net private capital flows to emerging markets are projected by the IIF [Institute of International Finance] to rise to US$825 billion at the end of this year from less than US$600 billion in 2008, while many emerging market currencies have risen by over 10% or above on a real trade-weighted basis over the last three years.
Calls to orchestrate a coordinated response to this have so far fallen on deaf ears. The focused cooperation that was dominant as global policymakers coordinated their actions to pull out of the global financial crisis even just a year ago appears to be breaking down. Aside from the growth disparity between the slow-to-recover developed countries and the fast-recovering emerging market nations, the steep deterioration in the public finances of many developed countries has raised fears over the risks to global economic stability.
Finance ministers meeting at the annual World Bank and IMF conclave earlier this month were unable to reach an agreement on how to confront the challenge, in the0 end sidestepping it almost completely by enlisting the IMF to study and monitor how to best manage capital flows and/or passing on the problems for the G20 to solve.
2012, May 22 
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