The coronavirus crisis will lead to long-lasting revenue losses for emerging market (EM) sovereigns said Moody’s investor Services.
“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.”
Subdued global recovery will shift focus to broadening tax bases, which will be challenging. EM fiscal revenue will remain below pre-crisis levels amid a slow and halting global economic recovery. As a result, EM governments will, with the support of development finance institutions, 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 preexisting 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 (B3stable) and Bangladesh (Ba3 stable) will face additional hurdles.
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.
The crisis has underlined the importance of revenue generation for EM governments.
“We expect government revenue in EMs will fall by an average 2.1 percentage points of GDP in 2020, more than twice the 1.0 pp drop in AEs.”
Government revenue in EMs is more vulnerable to this crisis because it tends to be more reliant on taxes on international trade (8% of total revenue on average in 2018 in EMS, compared to less than 1% in AEs), which has collapsed this year.
EMs also tend to rely on taxes on flows rather than stocks (such as wealth or property taxes), being much more reliant on taxes on goods and services (G&S) than AEs. Less sophisticated tax administration also tends to make EMs’ revenue cyclical.
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