Emerging market (EM) sovereigns will suffer long-lasting revenue losses due to the coronavirus crisis, with governments' ability to implement and enforce effective revenue-raising measures set to be a key credit driver over the coming years, Moody's Investors Service said in a report Monday. Almost all EMs will record budget deficits this year and face constraints in cutting spending amid the pandemic, amplifying the importance of revenue generation. EM fiscal revenue will stay below pre-crisis levels amid a slow and halting global recovery. On average, EM governments will lose revenue worth 2.1 percentage points of GDP in 2020, above the 1.0 pp loss in Advanced Economies (AEs). "The coronavirus crisis has underlined the importance of revenue generation for emerging market governments," said Lucie Villa, a Moody's Vice President - Senior Credit Officer and the report's author. "For EMs, any fall in revenue is particularly important for creditworthiness because their government spending needs – social, infrastructure and debt financing – are often more urgent than for advanced economies and they have a generally narrower revenue base." With the support of development finance institutions, EM governments will look to implement or resume tax-raising measures. However, only a few governments have successfully raised revenue much faster than GDP growth over the last 10 years. Sovereigns with a pre-existing and established focus on raising taxes from low levels like Costa Rica, or past episodes of effective tax policy changes like Georgia and Montenegro, will likely fare better. Sovereigns already struggling to increase their tax intake before the pandemic, like Tanzania and Ethiopia, Sri Lanka, Pakistan and Bangladesh will face additional hurdles. Key points: • The ability of EM governments to implement and enforce effective revenue-raising measures in response will be an important credit driver over the next few years because of their sizeable spending pressures and the subdued recovery in the global economy we expect next year • The shock will trigger large revenue losses. On average, EM governments will lose revenue worth 2.1 percentage points (pps) of GDP in 2020, exceeding the 1.0 pps loss in advanced economies (AEs) • Fiscal revenue in EMs is particularly vulnerable to this current crisis because of concentrated revenue structures and less sophisticated tax administrations than those in AEs • Oil exporters will see the largest falls but revenue volatility is a common feature of their credit profiles historically. Among oil-importing EMs where revenue is typically more stable, Cambodia (B2 stable), the Maldives (B3 negative), Barbados (Caa1 stable), Belize (Caa1 negative), Thailand (Baa1 stable) and South Africa (Ba1 negative) will register some of the highest year-on-year falls • Sovereigns with a pre-existing and established focus on raising taxes from low levels like Costa Rica (B2 negative), or past episodes of effective tax policy changes like Georgia (Ba2 stable) and Montenegro (B1 stable), will likely fare better. Sovereigns already struggling to increase their tax intake before the pandemic, like Tanzania (B2 stable) and Ethiopia (B2 negative), Sri Lanka (Caa1 stable), Pakistan (B3 stable) and Bangladesh (Ba3 stable) will face additional hurdles — The report's author is Lucie Villa, a Moody's Vice President - Senior Credit Officer. — SG
