James McCormack, Fitch’s global head of sovereign ratings, discusses economic trends at Fitch Thailand’s annual economic conference.
Emerging markets are set to face rising economic headwinds in 2019 as global growth slows and financial conditions tighten, according to James McCormack, Fitch’s global head of sovereign ratings.
Rising US interest rates and the end of quantitative easing by the European Central Bank (ECB) will result in a tougher funding environment for emerging markets.
“We are expecting there to be a more normalised relationship between, say, the 10-year US bond yield and nominal GDP,” Mr McCormack told the Bangkok Post.
“If you look at the historical relationship between those two things, they are roughly equal over a long period of time. But that hasn’t been the case for most of the decade, where 10-year bond yields have been pushed lower. Not just in the US, but globally.”
After the global economic crisis in 2007, central banks embarked on large-scale asset purchases and expansionary monetary policies to help mitigate the downturn. These measures, known as quantitative easing, resulted in huge growth in central banks’ balance sheets as regulators sought to prop up asset prices.
“The ECB since 2015 has been buying more government debt then governments have issued,” Mr McCormack said. “So where do investors go, as they are pushed out of the government bond market? They are pushed into other asset classes, including emerging markets.”
As the US and European central banks begin quantitative tightening and interest rates rise, capital flows to emerging markets are likely to decline and grow in volatility.
“It may not be perfectly symmetric, such that every dollar or euro that went out [to emerging markets] comes back,” Mr McCormack said. “But in our expectation, there will be some funding that flows back to the advanced economies.”
A stronger US dollar will also push up debt service costs in local currency terms for emerging-market borrowers, as well as push down commodity prices in dollar terms.
According to Fitch, emerging-market dollar-denominated debt stands at US$4.5 trillion (147 trillion baht), compared with $1.7 trillion in 2007.
In any case, Mr McCormack said that Thailand, given its healthy current account surplus and position as a net capital exporter to the world, would be largely immune from the shift in financial markets.
But the Thai economy will be affected by slowing global growth and trade tensions. Fitch currently rates Thailand BBB+ with a stable outlook.
“Growth is not going to fall off the cliff [in 2019],” Mr McCormack said. “That’s not our expectation. Our baseline forecasts are for continued strength in the US. And [continued] good growth in China.”
Fitch forecasts global economic growth of 3.1% in 2019, compared with a projection of 3.3% growth this year.
Chinese authorities remain committed to their goal of becoming a “moderately prosperous society” by 2020, a target that implies a need to maintain annual growth of more than 6% over the next three years.
Mr McCormack said the trade war between China and the US and the impact on growth has yet to be fully seen. Regardless, tensions are pushing Chinese regulators to accelerate reforms to boost productivity and domestic demand, adjustments that will benefit the country in the long run.
Overall, it’s been a strong year for the global economy, with the number of sovereign rating upgrades outnumbering downgrades for the first time since the crisis. For the first three quarters of the year, Fitch upgraded 11 ratings, compared with five downgrades.
Mr McCormack said most of the upgrades were in Europe, while ratings in the Middle East and Africa faced pressure.
“The most stable region, as is always the case, is Asia, where ratings move less than in any other region,” he said.