• Tuesday, March 05, 2024
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BusinessDay

Moody’s: QE tapering could weaken liquidity of some EMEA

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Moody’s has published its latest EMEA speculative grade liquidity (SGL) report showing that, the primary threat to the liquidity of some emerging market companies as a consequence of US government tapering may lie in policy responses that impact the domestic macroeconomic environment and financial systems, including local banks.

According to Moody’s, responsive government and monetary policy decisions that raise interest rates could pressure corporate cash flows, and also reduce headroom under financial covenants or credit availability where reliance is on uncommitted facilities.

The more highly leveraged companies in Turkey and South Africa, which have experienced significant currency depreciation relative to the US dollar, may be most at risk with about 20 percent of rated Turkish and South African speculative-grade companies already having the weakest SGL rating (SGL-4).

However, not all EMEA-emerging market companies are equally exposed. The liquidity profiles of Russian companies generally appear stronger than those of other EMEA corporates, with only 13.5 percent of companies carrying the weakest SGL rating of SGL-4.

“The impact on our credit ratings may however be more limited as they are already positioned to incorporate a variety of factors including the reliability of access to funding,” says Tobias Wagner, analyst in the corporate finance team at Moody’s Investors Service and author of the SGL monitor report.

In addition, the report shows that the EMEA Liquidity Stress Index (LSI), which rises if liquidity weakens, slightly increased to 14.7 percent in December 2013. This primarily reflects weaker operating performance for a few companies despite the overall trend of credit stabilisation.