Best Rating Agency for Emerging Market Bonds — Moody’s Investors Service
Rating emerging market debt is difficult at any time, with economic and financial conditions to track across more than 100 countries, but since the start of the Covid-19 crisis it became even harder, with locally very different health outcomes and policy responses all feeding through to issuers. Moody’s stayed on top by drawing on its longstanding depth and breadth of local knowledge while keeping a focus on key themes such as ESG.
Moody’s covers around 1,700 emerging markets debt issuers across 107 countries from hubs in Argentina, Brazil, China, Dubai, Hong Kong, Mexico and Russia, as well as Frankfurt, London and New York. The scope of research it publishes is huge: over 800 thematic pieces a year, alone, alongside issuer-level reports.
“One of the things that we’re proud is that we ask broad, global, practical questions and our answers build on very local, country-sector-issuer specific expertise,” says Atsi Sheth, global head of emerging markets. “Predictions in a period of great uncertainty are of course difficult so our focus was to monitor events on the ground consistently.”
That became even more crucial than unusual as the coronavirus crisis spread around the globe.
“The pandemic hit everyone but it hit everyone in a particular local context,” says Sheth. “Policy responses were very different across emerging markets and it was very important to differentiate between economic conditions, financial conditions and health conditions.”
The heterogeneity of outcomes across asset classes within emerging markets is a key feature of the pandemic — as Sheth points out, in some cases fiscal deterioration at the sovereign level might have been serious but at the corporate level the situation, individual issuers might have been in a strong position.
“One thing we did well I think was making the link between the big story, that was the pandemic, the sector story and the issuer balance sheet story in order to understand the macro, financial and health pictures,” she says.
The pandemic might have been unprecedented in modern times but Moody’s was able to draw on its deep understanding of each country and its past performance to allow investors to distinguish areas of high risk in a fast-changing and chaotic environment.
“History mattered,” says Sheth. “The fact that going into the pandemic we had historically-informed views on governance, fiscal strength and resilience to past shocks was important for our ability to differentiate and highlight countries most at risk.”
While in many developed markets the worst of the Covid-19 crisis appears to have passed, some emerging markets are still suffering terribly. Meanwhile, EM countries, particularly commodity importers, face rising risks from higher prices, and a potential outflow of capital as interest rates rise in the developed world.
“We expect that the path to economic recovery for emerging markets will be paved by episodes of financial turbulence because the market is going to worry that US inflation will lead to monetary tightening,” she says. “We think that will create speed bumps in the recovery but we’re still expecting a recovery.”
Moody’s was also able to make use of a new generation of alternative data sources to assess conditions, such as satellite images and shipping data. “We saw very early, in July before any official statistics, that global trade was recovering quickly and that would be predictive of economic recovery in export-orientated emerging market countries,” says Sheth.
But amid all the immediate uncertainty, Moody’s kept its eyes firmly on the longer term story. “We didn’t lose track of the fact that this was all happening, ESG was becoming an increasing point of interest for investors and increasing driver of actions by corporates and governments,” says Sheth.
Emerging markets in some ways have always been an ESG story. Governance is a central point of investor concern, social risks such as unemployment and demographics are intimately linked with economic development, and the environmental risks due to climate change are paramount in countries with large agricultural sectors or those vulnerable to rising sea levels.
As an example, she points out that Moody’s was warning of the risks in India of drought and climate change five years ago.
“ESG considerations have always been part of the credit story but now investors and other stakeholders want those framed within an ESG methodology,” she adds. In response, Moody’s has started providing ESG scores alongside its traditional ratings. It has started with sovereigns and will roll out the scores to other sectors, says Sheth.