Islamic sovereigns show resilience in the face of global financial shifts, enhanced by hydrocarbon exports and diversification efforts. While loosening financial conditions and geopolitical challenges shape the credit outlook, opportunities for growth remain as these economies adapt to evolving macro trends and ESG concerns. RADHIKA DAS has the story.
On the IFN Podcast, Christian de Guzman, senior vice-president – manager at Moody’s Ratings’ sovereign risk group, shared insights into macro and credit trends among Islamic sovereigns. He began by highlighting the global macro-outlook, characterized by a steady, but lower real GDP growth for G20 economies. This reflects a bounce back from Europe following the energy crisis, slower growth in the US and structural deceleration in China.
Despite this, Islamic sovereigns have demonstrated resilience, largely driven by hydrocarbon-based economies such as those in the GCC, Malaysia and Indonesia. “The growth performance for Islamic sovereigns in general is fairly healthy, with many of these economies actively diversifying away from hydrocarbons, driving non-hydrocarbon growth,” Christian commented.
The Federal Reserve’s recent decision to ease rates by 50 basis points was discussed as a significant development. This has helped loosen global financial conditions, providing much-needed liquidity and advancing growth across various markets.
When evaluating risks and opportunities, the podcast explored how loosened financial conditions might influence credit growth in Islamic sovereigns, particularly those with exchange rates fixed to the US dollar. Export-dependent economies, like Malaysia, stand to gain from a cyclical uptick in exports, especially electronics, fueled by the churn in the Asia-Pacific region.
The conversation also touched on Malaysia’s Ekonomi MADANI, a framework enabled by the country’s recent political stability under the current government. Associated reforms such as the Natural Energy Transition Roadmap and the Industrial Master Policy are critical in Malaysia’s move away from hydrocarbon dependency, reaffirming a positive outlook. Amid broader geopolitical shifts and trends of investment and trade diversion away from China, Malaysia is capitalizing on these advantages, attracting foreign direct investment.
Regarding geopolitical risks, the podcast included concerns over the ongoing conflict in the Middle East and how it may particularly impact ship-bound trade and traffic through the Strait of Hormuz. Christian added: “Risks of the broadening of the conflict that we’re seeing in Israel are higher, but at the same time, we haven’t really seen evidence that those risks will materialize anytime soon. So, against that backdrop, we haven’t seen any weakening in terms of confidence; the rest of the Middle East continues to see a lot of investment as well as financial flows and economic activity has been sustained which is helping to underpin some of the positive outlooks we have in the region.”
Over the next 30 to 50 years, global demand for hydrocarbon products is expected to decline, so, countries that rely heavily on hydrocarbon revenue must implement mitigating measures to avoid detrimental impacts on economic growth and fiscal stability. Islamic sovereigns face a unique risk known as carbon transition risk, besides, Malaysia and Indonesia are also grappling with physical climate risks including rising sea levels and flooding. These factors become critical in assessing the credit ratings of these nations.
Christian concluded: “We have increasingly integrated ESG considerations into our ratings assessments. So, we’re trying to see how those environmental, social and governance risks impact the creditworthiness of a country.”
This is an excerpt of the interview with Christian de Guzman, senior vice-president – manager at Moody’s Ratings’ sovereign risk group. For the full discussion on macro and credit trends among Islamic sovereigns, log on to IFN Podcast.
