Moody's says most emerging market sovereign ratings unaffected by temporary global funding shortage

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Moody's says most emerging market sovereign ratings unaffected by temporary global funding shortage

London, 05 November 2008 -- Most emerging market economies are unlikely to experience sovereign rating pressures over the short term, says Moody's Investors Service in a new Special Comment entitled "Rating Sovereigns During a Global 'Sudden Stop' in International Funding". This is because the rating agency assumes that the current shortage of foreign currency funding in the world economy is temporary.

"The turmoil in the financial markets evolved in October from a crisis that was initially largely confined to sophisticated western financial systems, to a crisis that can be characterized as a global 'sudden stop' -- a term that refers to a sudden halt in international funding, eminiscent of the emerging market crises of the 1990s," says Pierre Cailleteau, Team Managing Director of Moody's Global Sovereign Risk Group.

For sovereign analysts, this interruption in international financing brings back to balance-of-payment basics.Banking systems in many emerging market economies have been facing limited access to a level of foreign currency funding that was once assumed to be the natural counterparty of global trade and financial integration. The new report explains the rating agency's approach to analyzing this unusual situation -- which is challenging some key assumptions about globalized finance -- and Moody's rating management approach.Specifically, Moody's new report addresses the following two questions:

(1) Will some countries' government imminent debt repayments be threatened by this situation?

(2) Will some governments' measures to address the short-term dollar financing needs of their economies materially weaken their credit metrics from a global relative standpoint?

"Moody's key assumption in this report is that international financialintegration is not unraveling -- rather, the current shortage of foreign currency funding in the world economy, in its current extreme form, is temporary," explains Mr. Cailleteau. That being said, the dearth of international bank lending and the panic-driven capital outflows -- if they were to persist during the first quarter of 2009 -- would call for a broad reassessment of Moody's core assumptions, and probably sovereign ratings.

Consequently, Moody's concludes that the majority of emerging market economies are not likely to experience rating pressures over the short term, because (1) they have accumulated sufficient reserve buffers, or

(2) they have access to a level of non-market funding (bilateral, regional or multilateral assistance) which the rating agency expects will remain on their balance sheet only temporarily -- or, of course, (3) they have not attained a sufficient level of integration within the world economy to be affected.

These conclusions are also in line with Moody's aim of "rating through" current dislocations, which refers to the rating agency's focus on avoiding wholesale rating changes, and only making selected rating adjustments based on what the rating agency perceives to be lasting relative changes in countries' creditworthiness.

Moody's notes that some countries have faced and will continue to face rating pressures -- indeed, during October 2008, the rating agency changed the outlook or the ratings of Latvia, Bulgaria, Ukraine, Pakistan and Iceland. Moody's believes that this will continue to be the case in countries where the current crisis magnifies underlying vulnerabilities and alters relative creditworthiness in a durable way; or where the governments' interposition of their own balance sheets to help fund the private sector is significant and unlikely to be reversed soon.

- Ends -

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Pierre Cailleteau
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Sovereign Risk Group
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© Press Release 2008