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The UAE has ample capacity to adjust to new economic realities while most emerging market sovereigns are set to suffer long-lasting loss of revenues owing to the ongoing coronavirus crisis, according to a new report.
Only the governments will have an ability to boost credit growth, and both Abu Dhabi and the UAE have Aa2 stable outlook on “fiscal policy effectiveness,” Moody’s Investors Service said in its latest report.
The “fiscal policy effectiveness” is a combination of a government’s capacity to adjust to a change in economic circumstances by raising additional revenue and an overall assessment of a sovereign's institutions and governance strength.
Other countries are not in a privileged state as the UAE as majority of emerging markets (EMs) are likely to record budget deficits in 2020 and face constraints in cutting spending amid the pandemic, amplifying the importance of revenue generation, said the report, adding that EM fiscal revenue will stay below pre-crisis levels amid a slow and halting global recovery.
On average, EM governments will lose revenue worth 2.1 percentage points (pps) of GDP in 2020, above the 1.0 pp loss in Advanced Economies (AEs), it said. “Government revenue in EMs is more vulnerable to this crisis because it tends to be more reliant on taxes on international trade (eight percent of total revenue on average in 2018 in EMs, compared to less than one percent in AEs), which has collapsed this year,” the report said.
Within EMs, oil-exporters will see the largest fall in revenue this year given the sizeable drop in both demand for and the price of oil and their heavy dependence on revenue derived from the sector. “Based on our forecasts, Kuwait (A1 stable) and Azerbaijan (Ba2 stable) will see the largest falls in revenue vis-à-vis GDP of 18.0 pps and 12.5 pps respectively this year,” it said.
Revenue generation is key
The pandemic has underlined the importance of revenue generation for emerging market governments, said Lucie Villa, a Moody’s vice-president, senior credit officer and the report’s author. “For EMs, any fall in revenue is particularly important for creditworthiness because the government spending needs – social, infrastructure and debt financing – are often more urgent than for AEs and they have a generally narrower revenue base.”
With the support of development finance institutions, EM governments will look to implement or resume tax-raising measures. However, only a few governments have successfully raised revenue much faster than GDP growth over the last 10 years, the report said.
Sovereigns with a preexisting and established focus on raising taxes from low levels like Costa Rica, or past episodes of effective tax policy changes like Georgia and Montenegro, will likely fare better. Sovereigns already struggling to increase their tax intake before the pandemic, like Tanzania and Ethiopia, Sri Lanka, Pakistan and Bangladesh will face additional hurdles, according to Moody’s.
The spending pressures faced by governments across the globe are unlikely to ease in the short term, particularly because this crisis has emphasised the social role governments perform in areas like healthcare and labour markets, said the report.
For EMs, these spending pressures are generally exacerbated by a range of other factors like a higher interest burden, infrastructure deficiencies, weaker broader public sector, higher subsidies, lower incomes, and more precarious employment. As a result, most of the burden for any fiscal consolidation is likely to fall on the revenue side, it added.
(Writing by Syed Atique Naqvi; editing by Seban Scaria)
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