Moody’s is “cautiously optimistic” for 2023 but sees more risk of default

Moody’s risk rating agency is “cautiously optimistic” with respect to the performance of the global economy in 2023, even when the recession can be avoided, and expects that the rate of cessation of payments or ‘default’ will be located at 5%, above the long-term average, its analysts affirmed this Thursday at the CIO Summit LatAm Edition.

According to the presentation given by Moody’s managing director and global head of Strategy and Research, Atsi Sheth, the rating agency expects that countries will still have to deal with lower economic growth than in 2022 and that inflation will remain high, as well like interest rates.

Sheth, however, claimed that “financial conditions are improving” and that the restrictive monetary policy cycle applied by the central economies is reaching its peak.

The expert indicated that it is because the market is seeing that inflation is going down, and that is the “trigger key” from the recession, so if inflation goes down, interest rates don’t have to go up very much. That China is reopening, after strong restrictions to combat COVID-19, and that European economies avoided recession despite the energy crisis.

At the CIO Summit LatAm Edition, which was held virtually, Sheth described that US consumption remains “robust” and that restrictive monetary policy “probably” stop mid-year.

Also that the reopening of China boosts growth prospects, but that the risks for Europe persist in the coming winter, so the conditions that allowed it to avoid recession should continue.

Default risk

In this context, Moody’s forecasts that global debt default rates will increase above the long-term average rates -located at 4%- in 2023, doubling compared to 2022 and positioning itself at 5%. .

However, they will not reach the double digits that they registered, for example, in the financial crisis of 2008-2009, with 13.5%.

For Latin America, although Moody’s foresees an increase in the default rate in 2023, it does not expect it to reach the peak of the pandemic.

High costs for Latin America

Moody’s outlook for Latin America is “negative”, due to the lower expected growth and higher financing costs that will be a challenge for domestic policy, according to the presentation made by the vice president and senior credit officer of the rating agency’s sovereign risk group, Jaime Reusche.

As negative aspects, he detailed the higher costs of taking on debt, less fiscal space -he anticipated that fiscal deficits would return to pre-pandemic levels-, weak investment prospects, persistent social tensions and slow economic growth.

As positive factors, he acknowledged limited exposure to geopolitical tensions and relatively stable debt dynamics.

“Governments will be forced to learn to do more with less”, warned Reusche, regarding the efficiency of public spending in a context of social demands due to increases in food and energy prices.

The corporate sector

Both the Regional Investment Manager for Latin America in Zurich, Ricardo Torresi, and the head of Global Credit Strategy and Wealth Management at JPMorgan, Xavier Vegas, agreed that Latin American debt issuing companies are “relatively prepared” to face the restrictive financial conditions.

Vegas, who warned that at JP Morgan they are “conservatives” for the region, highlighted a “cleaner” corporate sector after going through several crises in the last ten years.

Torresi added that the issuers “reduced financial needs” for the coming years, both in local and foreign currency and “they should not face tremendous challenges”, although he acknowledged a higher default rate.

Meanwhile, the director of Investments for Emerging Markets in the Americas at UBS Global Wealth Management, Alejo Czerwonko, added a more balanced position than his peers and highlighted the effect of the expansion of China for Latin America and emerging markets in compensation for the tightening of international monetary conditions.