China’s ambitious New Silk Road initiative — that aims to deepen the country’s economic integration with more than 40 countries in Asia, the Middle East, and Europe by creating an unbroken transport and infrastructure network to boost connectivity — is credit positive for the emerging market sovereigns involved, Moody’s Investors Services said on Tuesday.
Moody’s says it expects that the Silk Road Economic Belt and 21st Century Maritime Silk Road, which China refers to as its “Belt and Road” strategy, or “One Belt, One Road,” will primarily benefit smaller sovereigns that have relatively low per-capita incomes, financing constraints on their current account positions, and low investment rates.
Around two-thirds of the countries across the Belt and Road are rated by Moody’s, and of these countries, over half are rated as sub-investment grade, the rating agency said.
Other common threads that link these countries are that they have relatively underdeveloped economies with large infrastructure gaps, and tend to have modest per-capita incomes, Moody’s said.
Natural resource wealth in these countries has fueled dynamic growth, and although the recent plunge in commodity prices clouds their economic outlook, they exhibit fairly strong growth potential, the report said.
In this context, Moody’s says, the new silk roads could have a transformational impact for smaller, infrastructure-impoverished countries in South and Southeast Asia, by spurring investment and boosting economic growth potential.
Bangladesh, Cambodia, Pakistan, and Vietnam are likely to be the biggest beneficiaries of infrastructure investment, Moody’s said, however infrastructure financing could put a strain on government balance sheets of such participating economies.
Moody’s also said it expects bilateral trade flows to receive a boost, particularly in Central Asia, bolstered by infrastructure development.
Kazakhstan and Mongolia will likely benefit the most from improved trade linkages, Moody’s said.
Map courtesy of The Wall Street Journal
As for China, Moody’s said the New Silk Road will have tangible benefits as it will help counteract the country’s economic slowdown and jump-start investment, boost exports, and provide the access to commodities necessary for China to sustain strong economic growth.
In a related note, Moody’s said the initiative will prove a net positive for the Chinese economy — including the country’s underdeveloped inland and western provinces, as well as certain financial institutions and corporates — and promote the internationalisation of the renminbi.
“The provision of intra-regional investment and lending will encourage greater international use of the renminbi, which is one of the government’s stated economic reform objectives,” says Michael Taylor, a Moody’s Managing Director and the Chief Credit Officer for Asia Pacific.
Moody’s said that the One Belt, One Road plan is credit positive for large, financially strong Chinese corporates operating in industries such as steel, building materials, maritime transportation, power, and construction as they are expected to benefit most from the initiative, which will help develop new export outlets overseas.
The plan will is also credit positive for associated companies that use natural resources, such as oil and gas or agricultural players, as well as construction and railway companies, Moody’s said.
Chinese banks that are actively engaged in the initiative will benefit from wider market access and increased demand for loans, the rating agency said.
Moody’s points out that the New Silk Road initiative isn’t likely to provide an ultimate solution to major oversupply — and resultant credit concerns — in industrial sectors such as steel, cement, and mining, and will also not be a panacea for many smaller companies in overcapacity industries that are under increased financial stress.
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