KUALA LUMPUR (Dec 6): Economic growth outlook for emerging markets is more cloudy than advanced economies in 2019, Moody’s Investors Service said today.

"Growth will still be solid in advanced economies in 2019 (2.9% in G20 — group of 20 nations — in 2019), though growth outlook for emerging markets is more cloudy, with tightening monetary policy, rising trade protectionism and slower demand from China, which may have spillover effects to banks," its associate managing director Andrea Usai said in a statement today.

"(But) the generally supportive operating environment overall, will help banks to preserve the stronger capitalisation achieved in recent years," he added.

In its report on "Banks — Global 2019 Outlook" released today, Moody’s said geopolitical and domestic risks pose the greatest source of uncertainty and risk in 2019, with US-China tensions spreading far beyond trade disputes.

"In addition, the risks of a 'no-deal' Brexit scenario under which the UK banks' credit fundamentals would weaken, have increased.

"Meanwhile, domestic and political risks will continue to weigh on the outlooks for Argentina, Brazil, Italy and Turkey, with credit-negative implications for their banking systems," it added.

On the other hand, Moody’s said rising interest rates will help improve profitability, providing some boost to banks' net interest margins, as already seen in the US.

"Nonetheless, profitability will continue to be a credit weakness for many banking systems, particularly in Europe, with still low interest rates and elevated cost bases keeping returns on assets and capital, modest.

"As monetary policy gradually normalises in advanced economies, particularly in the US, volatility will return to financial markets, a challenge for many banks but also an opportunity for firms with large trading activities," Moody’s noted.

The global rating agency said emerging markets economies will remain vulnerable to spillover from monetary policy normalisation in advanced
economies, because of a likely further tightening of global liquidity, combined with currency pressures.

"Countries with large current account deficits, low reserves, high external debt repayments and substantial foreign-currency government debt, are most exposed," it said.

"Banks in emerging Asian economies will face slower economic growth in the region, tightening dollar liquidity and rising interest rates, though they have solid buffers protecting their credit quality. The key concern is the escalating US-China trade dispute and spillover effects on financial markets," it added.

Moody's is expecting the US Federal Reserve to continue raising interest rates, with the upper bound of its target range peaking at 3.5% by the end of 2019.