SOVEREIGN RISKS UNDER SLOWING EMERGING-MARKET GROWTH

Concept and determinants of sovereign risk are studied. Peculiarities of risk influencing macroeconomic factors, especially in the case of emerging economies considered to present a high risk are examined.

GDP growth in emerging markets is slowing. Uncertainty about sovereign debt threatens economic growth across the globe. It’s no surprise, expectations for the global economy are the lowest they have been since March 2011. Sovereign-debt defaults are the most-cited risk to global economic growth.

The overall purpose of the paper is to analyze the concept and determinants of “sovereign risk”. Firstly, to set out what is meant by “sovereign risk” - distinguishing it from, and comparing it with, other types of risk. An attempt to identify how risk can influence macroeconomic factors, especially in the case of emerging economies considered to present a high risk.

“Sovereign risk” refers to the risk that a government may default on its debt obligations. In general, when governments have bonds that are due to mature, they don’t have sufficient tax receipts on hand to repay all the debt, so they re-enter the market to raise further money via a bond issuance [1]. Sovereign risk thus includes “refinancing risk”, when a government is unable to raise sufficient new debt in the market (i.e. at reasonable market prices and in sufficient volume) to repay upcoming bond maturities. Sovereign risk can also be used to refer to a country imposing regulations, restricting the ability of issuers in that country to meet their obligations, such as foreign currency restrictions.

In terms of the current issues in Europe, the term sovereign risk has been used to widely categorize the large budget deficits and very high government debt levels of a number of countries, especially Greece, Italy, Ireland, Portugal and Spain. These countries, especially Greece, have both very high net debt levels and very high budget deficits, which are adding substantially to their debt burden.

Over the next decade, it is expected that emerging-market leadership is the likeliest outcome for the global economy, despite the slower GDP growth that India and Brazil posted in the first quarter of 2012 [5]. Still both developed and emerging markets are to struggle with ongoing structural challenges, as well as multiple economic and financial shocks.

Yet new threats to growth have emerged: sovereign-debt defaults and economic volatility are among the top three risks at both the country and global levels and are cited much more often than they were before. With respect to the global economy, sovereign-debt defaults are one of the biggest risks to growth over 2013 [2].

Considering the long-term obstacles, government regulation, low levels of innovation, and geopolitical instability will most likely hinder countries’ economic growth over the next decade. The risks vary greatly by region: developed Asian countries, for example, are more concerned with access to talent while India cite a lack of access to energy and commodities much more often than the global average.

Despite the ongoing economic recovery, the global financial system remains in a period of significant uncertainty. The baseline scenario is for balance sheets to strengthen gradually as the economy recovers, and as further progress is made in addressing legacy problems in key banking systems. However, substantial downside risks remain. Mature market governments face the difficult challenge of managing a smooth transition to self-sustaining growth, while stabilizing debt burdens under low and uncertain economic prospects [4].

Emerging market economies have proven resilient to recent turbulence, but are vulnerable to a slowdown in mature markets and face risks in managing sizable and potentially volatile capital inflows. Policy actions need to be intensified to contain risks in advanced and emerging economies, address sovereign debt burdens, tackle the legacy challenges of the crisis for the banking system, and put in place a new regulatory and institutional landscape to ensure financial stability [5].

It is necessary to investigate the possibility of identifying macroeconomic variables which could be associated with sovereign risk ratings which will effectively constitute a set of indicators which emerging economies would be well advised to improve upon in order to carry a series of knock-on effects regarding that country’s macroeconomic management.

References

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3. Economic Uncertainty, Sovereign risk, and Financial Fragilities. [web-source] /

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4. The Future of the Global Financial System. A Near-Term Outlook and LongTerm Scenarios. / [web-source] / A World Economic Forum Report: [site]. - Access:

https://members.weforum.org/pdf/scenarios/TheFutureoftheGlobalFinancialSyst em.pdf. - Screen name.

5. Winning the $30 trillion decathlon: Going for gold in emerging markets / [web-

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www.mckinseyquarterly.com/Winning_the_30_trillion_decathlon_Going_for_g old_in_emerging_markets_3002. - Screen name.

Жидяк О.Р.,

к.е.н., докторант, Науково-дослідний фінансовий інститут ДННУ «Академія фінансового управління» Міністерства фінансів України