Daily Update: October 5, 2023

Start every business day with our analyses of the most pressing developments affecting markets today, alongside a curated selection of our latest and most important insights on the global economy.

Credit Conditions in Emerging Markets

Every quarter, the credit conditions committees at S&P Global Ratings, composed of the chief economist at the regional and global level and the most senior rating experts across all asset classes, meet to define the base case that ratings analysts will use to underpin ratings forecasts in Asia-Pacific, North America, Europe and emerging markets. These reports are published on S&P Global Ratings’ website to create full transparency about the assumptions that substantiate credit ratings around the world. The report on emerging markets, “Credit Conditions Emerging Markets Q4 2023: High Interest Rates Sour The Mood,” was published Sept. 26.

Emerging markets (EMs) are a heterogenous mixture of differently sized economies and their industries across various regions. However, they share their exposure to interest rate increases, demand fluctuations from China, Europe and the US, and higher energy prices. Elijah Oliveros-Rosen, chief emerging market economist at S&P Global Ratings, wrote that exposure to structurally high interest rates, in the absence of structurally higher growth expectations, will constrain the investment growth of EMs. Although many EMs have already begun monetary easing in the face of reduced inflation, higher interest rates in the larger developed economies will increase the price of capital for EM companies and sovereigns. Growth is currently positive in most EMs but below recent trends for the foreseeable future. However, common risks for EMs include their exposure to economic trends in their larger trading partners.

“Those emerging markets that are more exposed to, or more reliant on, export, on external debt or in US dollar debt — they're going to be more under pressure from the slowdown in the global major economies that's going to impact trade,” said Alexandra Dimitrijevic, global head of research and development at S&P Global Ratings, during an upcoming episode of S&P Global’s “Essential Podcast.” “They're going to be impacted by a strong dollar and they're going to have to fight more for capital flows and for refinancing when investors might ask for a higher premium for some of the countries. So, they are going to be more under pressure in this environment.”

Credit conditions are stabilizing in many EMs. Fading inflation and low employment are powering economic resilience and the pace of ratings actions has slowed, resulting in fewer upgrades or downgrades. However, the balance of risks for EM credit is on the downside. Growth has weakened, inflation remains a factor and interest rates remain high. Higher rates are making funding expensive for many EM issuers. With a global maturity wall approaching in 2025, this interest rate environment could put significant pressure on lower-rated issuers, leading to potential defaults and bankruptcies.

Other areas of potential risk for EMs include a return of higher inflation due to energy prices and the agricultural impact of El Niño weather patterns. Depending on the trajectory of the Chinese, European or US economies, EMs may suffer follow-on effects. To paraphrase a popular expression: When Beijing, Brussels or Washington sneezes, emerging markets catch a cold.

Today is Thursday, October 5, 2023, and here is today’s essential intelligence.

Written by Nathan Hunt.

Economy

US Social Housing Providers Have The Foundation To Insulate Against New Post-Pandemic Risks

Due to their strong enterprise risk profiles, which incorporate low industry risks, along with solid market positions, good management and, in certain cases, strong government funding, the social housing providers (SHPs) S&P Global Ratings rates mostly stand in the 'AA' and 'A' categories. These SHPs include both public housing authorities (PHAs) and nonprofit social housing providers (NFPs), which we collectively refer to as SHPs. In the case of PHAs, the application of S&P Global Ratings' criteria for government-related entities (GREs) could raise the final issuer credit rating (ICR) relative to the stand-alone credit profile due to PHAs' public policy role and strong link with the federal government, and the moderate likelihood of extraordinary government support.

—Read the report from S&P Global Ratings

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Capital Markets

Listen: Take Notes — A Comparative Overview Of US And European BSL CLOs

Analysts Daniel Hu, Rebecca Mun and Abhijit Pawar join to discuss US and European BSL CLOs. First, hear a recap of a CLO panel at a recent S&P Global Ratings-hosted European Structured Finance conference, "Navigating Challenges; Seeking Opportunities," where amendments and extensions were a focus. They then deep dive into a comparative overview of US and European BSL CLOs, going into specific similarities and nuances between CLOs from both markets.

—Listen and subscribe to Take Notes, a podcast from S&P Global Ratings

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Global Trade

Global UCO Supply To Double By 2030 As US, EU Policies Drive Asian Supply

Global supplies of used cooking oil is expected to more than double to 31 million mt by 2030, from the current 14 million mt, market participants said over September, a development driven by rapidly growing Asian supply geared towards cashing in on US and EU incentives for biofuels made from agricultural waste and non-agricultural feedstocks. In the EU, biodiesel made from UCO, also known as used cooking oil methyl ester, or UCOME, is counted twice towards emissions savings targets, while the US' Inflation Reduction Act also supports tax credits for clean fuels and Sustainable Aviation Fuel.

—Read the article from S&P Global Commodity Insights

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Sustainability

Listen: Decarbonizing Cement And Concrete - Major Opportunity Or Death By A Thousand Cuts?

Fossil fuels used for power and vehicles have been in the spotlight as the Biden Administration seeks to reduce economy-wide carbon emissions to net-zero by 2050. But the US industrial sector is also a key source of carbon emissions, accounting for one-third of all energy related domestic greenhouse gas emissions, according to the US Department of Energy. Carbon emissions from industrial processes like cement and concrete manufacturing can be difficult to abate because emissions come from many different steps in the process. Marty Ozinga, CEO of concrete company Ozinga, joined new Capitol Crude co-host Kate Winston on the podcast to discuss some of the opportunities available to decarbonize the cement and concrete sector.

—Listen and subscribe to Capitol Crude, a podcast from S&P Global Commodity Insights

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Energy & Commodities

ONGC Bets On Domestic Upstream Push, Eyes Overseas Producing Assets

India's ONGC Ltd is actively pursuing a multi-pronged growth strategy that will involve vast expansion of exploration acreage at home, acquiring producing assets overseas, as well as building new crude-to-chemicals projects, its chairman and CEO Arun Kumar Singh said. In an exclusive interview with S&P Global Commodity Insights, the head of the state-run upstream producer said he strongly believes that sustained growth in demand for both transport fuels and petrochemicals would continue in India for a couple of decades despite energy transition starting to take away share of fossil fuels in many countries.

—Read the article from S&P Global Commodity Insights

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Technology & Media

Global Heavy-Duty Truck Sales Gain Momentum Amid Mounting Risks

Improving deliveries in China and Russia will materially boost growth in APAC and Europe, respectively. According to S&P Global Ratings' forecast, global sales of heavy-duty trucks will grow by 12.5%-17.5% in 2023 to slightly more than 2.0 million units. This is supported by improved sales in China following significant prebuying in 2021, which triggered collapsing deliveries in 2022. In addition, deliveries in Russia have grown rapidly in 2023, materially boosting the units sold in the European continent. Overall, for Europe (excluding the Russian market, where rated European and North American truck makers are no longer operating) and the US, the high order backlog accumulated by truck makers should support growth as supply chain constraints are being progressively managed.

—Read the report from S&P Global Ratings

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