While the growth prospects for the US and Europe is firming up, emerging economies like India and China are still facing structural constraints that would pull down growth and will weigh on demand for commodities and government revenues. The expected tapering of the US Federal Reserve's quantitative easing could impact the current account balance of emerging nations and reduce debt affordability because of the increase in foreign currency-denominated exposures and balance-of-payments vulnerability.
A Moody's report on global sovereigns underlines that structural constraints such as infrastructure bottlenecks, skills deficit, weak institutions, deficient governance and corruption will weigh on emerging market growth. Almost half of India's slowdown was due to structural factors. These were even more significant in the case of China, accounting for almost 60% of the deceleration of the past three years (2011-13). In Russia, structural factors related to oil prices accounted for 16% of the slowdown in the same period. Despite a high savings rate, the infrastructure sector in India still faces funding shortages, which is one of the major factors the current economic slowdown.
Brazil, China and India, the report says, have been responsible for two-thirds of the slowdown in all emerging countries since 2010, underscoring the importance of these countries once considered growth-drivers to both regional and global economies. Also, since the 2009 peak of the “growth gap”, the differential between developed and emerging nations has almost halved and is expected to further contract over the medium-term, clearly indicating the improving growth prospects for developed economies.
On sovereign credit-worthiness, the number of negative rating outlooks among advanced economies has declined to 11 from 17 at the start of the year. In contrast, the number for emerging economies has remained unchanged at 18 since the beginning of the year, while positive outlooks have declined to eight from 10, raising concerns that favourable credit trends are dissipating in emerging markets.