India will be among the large emerging market sovereigns to have the highest debt burden by 2021, said by Moody’s Investors Service on Tuesday. According to the report, the coronavirus pandemic-induced deterioration in growth and fiscal dynamics will leave most large emerging market sovereigns with higher debt burdens over the next few years. It also added that they expect government debt in the large emerging market sovereigns to rise by almost 10 percentage points of GDP on average by the end of 2021 from 2019 stages, driven primarily by large primary deficits, although some are likely to see bigger interest payments contributing to higher debt.
In the report, Debt burdens in Brazil, India and South Africa will rise to among the highest across the large emerging market sovereigns by 2021. The US-based rating agency said medium-term growth and fiscal challenges pose downside risks as some of these nations face economic risks and potential revenue shortfalls beyond the immediate shock, given their exposure to commodities, tourism and generally sectors exposed to lasting changes in behaviours, weak global demand and persistently weaker productivity growth.
Moody’s also noted that fragile financial systems or contingent liabilities compound this risk for India, Mexico, South Africa and Turkey. It added that in India, increased stress within the financial system, among banks and non-bank financial companies, increases contingent liabilities risks to the sovereign.
Sovereign fundamentals generally in emerging markets appear to be in relatively good shape, especially compared with the late 1990s and with the developed markets. There are extremes of positioning: India and Hong Kong are at opposite poles when it comes to government debt while Turkey and the Philippines look completely different in terms of exposure to potential spikes in the cost of external financing. Moreover, Turkey looks relatively healthy on government debt measures and India is well-positioned about its external financing needs. Many countries score poorly in one area of financial stability, but better in another, which acts as an offset.
The agency said that despite steps toward the resolution of high non-performing loans, the banking system continues to suffer from weak asset quality, and low loan-loss coverage and capital adequacy. This is happening due to the case for state-owned banks, which account for around 70 per cent of total banking system assets. They also added that lingering fragilities in the sector are likely to be compounded by a prolonged period of subdued economic activity compared to pre-corona virus levels.
