Emerging Markets – Global: 2024 Outlook — slow growth but improving financial conditions stabilise outlook

Financial conditions will ease gradually in 2024, although the effects of higher for longer interest rates will curb growth and liquidity across EMs. We expect bond yields to decline and the US dollar to soften. However, debt affordability ratios will deteriorate across EMs as a whole as borrowers refinance and add new debt stock at higher absolute rates. As a result, debt sustainability risks for both frontier sovereigns and lower-rated nonfinancial companies will remain high.

Weak but improving credit conditions point to a more stable outlook for emerging markets (EMs) in 2024. Loosening financial conditions will bring gradual relief but higher for longer interest rates combined with sluggish growth and persistent inflationary pressures will still hurt weaker borrowers. While economic considerations will dominate, structural shifts, reform and regulation and polarization will all shape credit outcomes.

Average GDP growth to slow in 2024, but so will inflation

Inflation and growth forecasts across major emerging markets

1. See our previous EM Macro Outlook, 5 September 2023. 2. The US Federal Reserve aims for inflation of 2% over the long term. 3. Exchange rate arrangement is conventional peg to the US dollar. 4. The Central Bank of Argentina is targeting gradual disinflation under the country's IMF programme.

Source: Moody's Investors Service

Higher interest costs will weaken debt affordability, reducing fiscal buffers

Debt to GDP ratios will remain steady but interest/revenue ratios will climb in 2024

Average debt/GDP and interest/revenue of all rated EM sovereigns.

Source: Moody's Investors Service

Ratio of sovereign downgrades relative to upgrades (drift) has stabilised; default rates will remain above long-term averages

Source: Moody's Investors Service

Emerging Markets – Global: Credit conditions remain weak but rate of EM sovereign downgrades slows

Emerging market (EM) credit conditions will remain weak and largely driven by spillovers from the US which include monetary policy, banking system stress and any consequences of the debt ceiling impasse. EM central banks remain vigilant to high inflation and for the most part the direction of domestic interest rates remains in lockstep with the Fed. We expect tighter credit growth to push the US economy into a mild recession in the second half of the year; frontier market economies remain the most exposed to tighter credit conditions.

Latest US developments add to existing policy uncertainty

For emerging markets, US-led risks will likely transmit through a tightening in financial conditions and the associated policy response. Risks to our baseline include whether and how quickly US inflation subsides and the Fed's response to it. This, coupled with the probability of further credit tightening, could push the US economy into a deeper-than-expected recession.

Growth will decline in most EMs this year; inflation will fall but remain sticky in a few countries

Uneven growth resilience meets slow disinflation in some countries while in others, especially Latin America, an easing of monetary policy later in the year is possible. While some EM currencies have experienced weakness in recent months, for the most part, they have held up well. We expect this to continue as EM central banks maintain their focus on tackling inflation. Rising real rates in a number of larger EMs is a further positive support.

China's rebound remains only a small net positive for most EM economies

China 's economic improvement continues to favor services and domestic consumption, rather than credit growth and infrastructure spending. Positive spillovers are largely limited to other economies in the Asia-Pacific region. We continue to believe China's growth will gradually decline over the medium term given structural factors.

Rate of sovereign rating downgrades relative to upgrades has slowed

Over the last year, the pace of EM sovereign downgrades relative to upgrades was high given the exposure of frontier economies to tightening financial conditions. While further downgrades are possible given that the net outlook bias remains negative, our data suggests a degree of stabilization in overall portfolio volatility.