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Subdued EM Growth Weighing on Ratings

Weak emerging-market (EM) GDP growth is weighing on sovereign ratings, Fitch Ratings says. The median rise in GDP per capita in US dollars at market exchange rates for 81 Fitch-rated EMs over 2011–2021 is set to be only 10%, compared with 39% for the US.

Median real GDP growth has been slowing since the mid-2000s, but still averaged 4.0% over 2010–2019. However, it can paint an overly rosy picture of living standards where it reflects population growth or is undercut by real exchange-rate depreciation. GDP in US dollar terms is relevant in capturing a country’s weight in global trade and financial markets or its capacity to service foreign-currency debt – mainly in US dollars.

Weak GDP growth can exacerbate fiscal, social and political risks. The lower a country’s growth rate, the larger the primary budget balance it must run to stabilise debt/GDP for a given interest rate.

The 20 worst-performing countries on growth in GDP per capita in US dollars have had a 2.4 notch decline in their average ratings since end-2010, compared with 1.3 notches average for all EMs, and no net change for the 20 best-performing countries. The trends also reflect factors such as oil prices and economic distress.

The EMs with the greatest rise in GDP per capita in US dollars in 2011–2021 (based on Fitch’s forecasts for this year) are Bangladesh, Ethiopia, China, Laos and Vietnam. Angola, Suriname Lebanon and Brazil had the greatest decline. Five of the bottom 13 defaulted over the period.

EM growth prospects will depend on factors, including the pandemic’s evolution, commodity prices, investment rates, demographics and labour market participation, structural reforms, export market growth, the quality of governance and policy making, debt overhangs, and vulnerability to shocks.
Source: Fitch Ratings

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