Emerging Markets Risky Credits: Issuance Activity And Deleveraging Plans

The number of issuers rated 'CCC+' and lower has decreased to 13 as of September 2024, or 9.6% of the speculative-grade universe. Four of the 13 risky credits have a negative outlook.

Financing conditions loosened further in the second quarter, spurring some 'CCC+' and lower rated issuance for the first time since November 2021. Risky credits tapped the market for refinancing purposes, and should be able to keep doing so provided macroeconomic and political uncertainties and geopolitical risks do not worsen.

Forecasted financial ratios point to gradual deleveraging and a pick-up in liquidity profiles and interest coverage ratios. But this will be to the detriment of capital expenditure in 2025-2026.

U.S. Policy Uncertainty Guides Market Stance

Inflation eased in most emerging markets (EMs) in 2024, though the median remains above most central bank targets. Food inflation dropped, except in India and some Sub-Saharan Africa’s economies. Energy prices rose in Latin America (LatAm) due to subsidy cuts in some cases, but declined in Asia and in Europe, the Middle East, and Africa (EMEA).

Most EM currencies depreciated in 2024, particularly in Q4, driven by rising U.S. inflation expectations and the potential for less Fed rate cuts. LatAm currencies were most affected, while idiosyncratic factors hit EM EMEA. The 2025 outlook remains cloudy given uncertainties over U.S. rates and trade policies, as well as downside risks to growth.

EM central banks remain cautious amid U.S. trade and fiscal policy uncertainty, scaling back rate-cut expectations. The Fed’s policy remains critical, as it could intensify capital outflows from EMs that ease rates too aggressively. Brazil diverges, hiking rates by 225 basis points (bps) since September 2024 due to fiscal concerns.

EM rating performance pointed to credit resilience in 2024, given the low number of downgrades from the historical perspective and positive sovereign ratings/outlook revisions. While supported by the U.S. soft landing, credit conditions face challenges from U.S. protectionism in 2025

The amount of rated bond issuance in EMs was higher in 2024 than in the past three years. Largely fixed-rate issuance, with a growing reliance on hard currency. However, benchmark and corporate yields rose in December and are 55 bps higher than in September 2024, mirroring the substantial geopolitical and policy uncertainty surrounding EM markets.

Mexican Structured Finance Market Update: Spotting Opportunities Amid Economic Challenges

Demand for financing in the industrial, retail, and office sectors--coupled with a growing real estate market--is creating opportunities for CMBS (commercial mortgage-backed securities) transactions, primarily in the northern region.

There's also potential for cross-border transactions, which encompass various financial assets, properties, future flows, remittances, etc. However, foreign exchange exposure and a potential sovereign rating ceiling could be roadblocks.

Demand for data centers' data storage and processing capabilities has been growing globally, and Mexico is no exception, translating to an opportunity for structured finance transactions in that sector.

Repackaged ABS securities are widely used in Latin America to finance mainly infrastructure and related projects. With the Mexican government's significant need for infrastructure funding, we believe repackaged securities are a potential alternative to tap the international markets.

Saudi Private Healthcare: Vital Signs Are Strong

We anticipate sustainable strong demand for private healthcare providers in Saudi Arabia, thanks to favorable demographics, ambitious national transformation program targets, and relative under-penetration.

While the private healthcare sector is fragmented in Saudi Arabia, most providers plan to expand, and we expect this to boost their profitability margins and market share.

We expect that private domestic players' credit quality will depend on their cash-collection trends, the flexibility of their cost structures, and their financial-policy commitments.

Paving The Way: Efficient Infrastructure Key To Emerging Asia's Growth

A marked improvement in infrastructure and logistics will support the next leg of growth for the emerging markets of Asia.

Economies can unlock higher growth rates through accelerated investment in infrastructure assets on top of infrastructure efficiency gains.

The pandemic eroded budget capacity, which will constrain public capital spending. Improving so-called soft aspects of infrastructure such as the regulatory environment can support faster economic growth.

Banks In Central Asia And The Caucasus Rush To Grab A Slice Of The Digital Pie

Rapidly developing technology, improving affordability, and growing mobile and internet connection in Armenia, Azerbaijan, Georgia, Kazakhstan, and Uzbekistan support strong growth of digitalization of financial services.

Banks are investing in digital platforms to meet growing demand from clients for mobile and online financial services. We expect digital leaders to strengthen their market positions; those lagging behind face widening technology gaps.

In Armenia, Azerbaijan, Georgia, Kazakhstan, and Uzbekistan a few dominant players have stable market positions that smaller banks and fintech players are unlikely to challenge in the near term.

Lending and deposit-taking are less vulnerable to the digital disruption but banks face tougher competition in digital payments. This could encourage banks to further acquire fintechs, including cross-border transactions.

Geopolitical risks are driving digital innovation through migration-induced knowledge transfer but also pose negative effects such as increased control over internet services, cybersecurity risks, regulatory risks, and risks related to political tension.