Emerging markets deluged with capital as economies recover

A report from Moody’s Investors Service lists currency appreciation and the massive capital inflows for emerging markets as consequences of their rapid economic growth.

The ratings firm also said that while emerging countries have been enjoying improved credit positions and faster growth than developed economies since the global financial crisis, the recovery comes at a price for them.

"While there has been a rating convergence between the two groups, a number of emerging nations have seen their currencies appreciate strongly due to high growth and attractive valuations," said Moody's Vice President -- Senior Analyst Patrick Esteruelas, author of the report. "This has been coupled with very loose monetary conditions in core developed markets, causing massive capital inflows to emerging markets,” he said.

The overall ratings direction for the various regions reflect Latin America's clear improvement over the last three years followed by Middle Eastern, African and Asian credits. Europe's ratings, on the other hand, have been hit hard by the crisis.

"How governments and central bank authorities have responded to 'the wall of money' depends on their policy priorities and their ability to intervene aggressively and effectively in the market," said Esteruelas. "The different responses range from Chile's hands-off approach to the adoption of targeted capital controls in Brazil and Thailand," he added.

While Moody's does not foresee any immediate ratings impact from these actions or the developments that preceded them, Esteruelas said the rating agency will monitor how countries adjust to the changing international landscape, especially as they impact economic growth and fiscal and debt dynamics.

"We will closely follow the potential effect these actions of the next few months on the speed and volume of capital flows to emerging economies and how emerging nations rise to this challenge," said Esteruelas.