40 - SC - Emerging Market Sovereign Research Series

SPECIAL COMMENT
SOVEREIGN & SUPRANATIONAL

MARCH 25, 2014

This report is part of our ongoing coverage
on China and Emerging Markets
Prospects and Challenges. Access our
archive of related research on this theme.

Analyst Contacts:
NEW YORK +1.212.553.1653
Bart Oosterveld +1.212.553.7914
Managing Director - Sovereign Risk
bart.oosterveld@moodys.com
Mauro Leos +1.212.553.1947
Vice President - Senior Credit Officer/Manager
mauro.leos@moodys.com
LONDON +44.20.7772.5454
Yves Lemay +44.20.7772.5512
Managing Director EMEA Sovereigns
yves.lemay@moodys.com
Sarah Carlson +44.20.7772.5348
sarah.carlson@moodys.com
Matt Robinson +44.20.7772.5635
Director of Sovereign Research
matt.robinson@moodys.com
SINGAPORE +65.6398.8308
Thomas J. Byrne +65.6398.8310
Senior Vice President/Manager
thomas.byrne@moodys.com
FRANKFURT +49.69.70730.700
Dietmar Hornung +49.69.70730.790
Associate Managing Director
dietmar.hornung@moodys.com

Emerging Market Sovereign Research Series
External Vulnerabilities, Exposures, Mitigants
and Credit Supports
Creditworthiness of those with external imbalances, reliance on external funding and weak policy
frameworks most vulnerable to financial market volatility
Recent financial market volatility and pressure on emerging market currencies has
underscored the potential vulnerability emerging market sovereigns face during an extended
period of uncertainty. Emerging market countries with external imbalances, reliance on
external funding and weak policy frameworks will remain vulnerable to sentiment changes,
capital flow adjustments or disorderly market reactions amid the monetary normalisation
process in the US and ongoing concerns regarding emerging market growth prospects.
This compendium provides a point-in-time snap-shot of exposure to capital flow
adjustments and disorderly market reactions for some of the largest emerging market
sovereigns, along with mitigants that support creditworthiness and provide capacity to
manage external financial and economic shocks. Our emerging market sovereign external
vulnerability heat map summarizes our assessment of key external vulnerabilitiesone
element of our assessment of sovereign creditworthiness.

Emerging Market Sovereign External Vulnerability Summary Heat Map
Vulnerability indicators Policy space

Moodys Sovereign
Credit Rating
Current account
balance,
% of GDP (2014F)
External
Vulnerability
indicator* (2014F)
Gross borrowing
requirement,
% of GDP (2014F)
Govt. FC Debt/
Total Govt. Debt,
% (2014F)
CPI Inflation,
% (2014F)
General govt. debt,
% of GDP (2014F)
Chile Aa3 stable -3.8% 126.9% 2.1% 17.4% 2.8% 11.9%
China Aa3 stable +1.9% 16.5% 6.2% 1.2% 3.5% 34.2%
Korea Aa3 stable +4.2% 46.8% 0.6% 1.6% 2.8% 36.5%
Czech Republic A1 stable -1.5% 92.1% 10.2% 20.0% 1.3% 50.5%
Poland A2 stable -1.5% 136.4% 8.3% 36.1% 1.4% 50.5%
Malaysia A3 positive +4.3% 53.6% 10.3% 3.1% 2.8% 55.4%
Mexico A3 stable +1.8% 60.0% 9.2% 18.5% 3.9% 31%
Russia Baa1 stable +1.3% 22.6% 2.4% 20.7% 5.3% 14.6%
Thailand Baa1 stable -0.6% 45.7% 8.2% 1.9% 2.9% 32.8%
South Africa Baa1 negative -5.1% 84.1% 12.2% 7.9% 6.5% 45.9%
Peru Baa2 positive -5.0% 20.7% 1.3% 49.1% 2.5% 17.1%
Brazil Baa2 stable -3.0% 24.0% 12.5% 5.0% 5.7% 61.9%
Colombia Baa3 positive -3.4% 60.0% 6.2% 25.2% 3.1% 32.4%
Philippines Baa3 positive +2.5% 29.3% 7.9% 34.3% 3.5% 40.9%
India Baa3 stable -2.9% 72.7% 12.0% 6.5% 9.0% 66.8%
Indonesia Baa3 stable -3.1% 63.2% 3.7% 46.7% 5.8% 24.9%
Turkey Baa3 stable -6.2% 171.3% 10.5% 30.0% 8.2% 35.2%
Hungary Ba1 negative +1.5% 158.6% 23.1% 49.5% 2.4% 79.7%
Argentina Caa1 stable -0.8% 101.1% 5.7% 62% 30.0% 48.5%
Venezuela Caa1 negative +3.4% 610.5% 5.4% 51.1% 35.0% 34.1%
Ukraine Caa2 negative -6.8% 300.4% 12.0% 51.1% 2.3% 47.6%
* EVI = (Short-term External Debt + Currently Maturing Long-Term Debt + Nonresident Deposits Over One Year)/ Official Foreign Exchange Reserves
Central govt, debt only.
Source: Moodys Investors Service
Minimal vulnerability, considerable flexibility Moderate vulnerability, moderate flexibility Elevated vulnerability, diminished flexibility

2 MARCH 25, 2014

SPECIAL COMMENT: EMERGING MARKET SOVEREIGN RESEARCH SERIES:
EXTERNAL VULNERABILITIES, EXPOSURES, MITIGANTS AND CREDIT SUPPORTS

Table of Contents
KEY INDICATORS OF SOVEREIGN EXTERNAL VULNERABILITY AND CREDIT SUPPORT 3
INDIVIDUAL EMERGING MARKET SOVEREIGN EXPOSURES, VULNERABILITIES,
MITIGANTS AND CREDIT SUPPORTS 7
ARGENTINA: Haphazard Policymaking and Unreliable Statistics Undermine Confidence
in Capacity to Manage Adverse Shocks 8
BRAZIL: Strong Resilience to External Shocks, Despite Rising Debt Levels and Below-Trend Growth 10
CHILE: Very Low Vulnerability to External Shocks Due to Low Debt Levels, Fiscal Strength 12
CHINA: Capital Controls, Strong External Balance Sheet Insulate Sovereign and
Economy from External Financial Shocks 14
COLOMBIA: Adequate Financial Buffers, Coherent Economic Policies Mitigate Negative Spillovers 16
CZECH REPUBLIC: Ample Liquidity, Floating Exchange Rate Keep External Vulnerabilities in Check 18
HUNGARY: Structure and Size of Debt, Large Financing Needs and Policy Unpredictability Present Risks 20
INDIA: Current Account Correction and Government Debt Profile Limit Sovereign Exposure,
But Political and Growth Uncertainty Underpin Capital Account Volatility 22
INDONESIA: Reliance on Foreign Funding Poses Risks, But Sizable Buffers
and Considerable Policy Space to Respond If Necessary 24
KOREA: Current Account Surplus and Strengthening Net International Investment Position
Reduces External Vulnerability 26
MALAYSIA: Favourable Debt Structure, Minimal Currency Risk Mitigates High Public Indebtedness 28
MEXICO: Domestic Debt Orientation and Financial Buffers Limit External Vulnerabilities 30
PERU: Sizeable Foreign Exchange Reserves, Low Government Debt Burden Increase Shock-Absorption Capacity 32
PHILIPPINES: Continuing Improvement in Philippines Debt Profile Helps Funding Resilience 34
POLAND: EU Funding and IMF Credit Line Underpin Sustainable External Payments Position 36
RUSSIA: Low External Debt and Large Foreign Exchange Reserves Limit External Vulnerability 38
SOUTH AFRICA: Manageable Debt and Low FC Exposure Lessen Vulnerability to Rand Weakness 40
THAILAND: Political Crisis Eroding Thailands Traditional Buffers 42
TURKEY: Political Turbulence and Market Volatility Heightens Turkeys External Vulnerability 44
UKRAINE: Fragile External Liquidity Situation Due To Large Current Account Deficit,
Unstable Access to Finance and Political Uncertainty 46
VENEZUELA: Precarious Foreign Exchange Reserve Levels, Dependence on Oil Exacerbate External Vulnerabilities 48

3 MARCH 25, 2014


Box 1: Key Indicators of Sovereign External Vulnerability and Credit Support
While there are a vast number of different indicators of an individual sovereigns vulnerability to
adverse external events that negatively affect creditworthiness, our heat map highlights what we
consider to be some of the key indicators of vulnerability to external financial and economic shocks.
Similarly, while there are various ways to assess a sovereigns so-called policy space to manage
external shocks, our heat map concentrates on two key indicators of government and central bank
policy capacity that provide an indication of a sovereigns capacity to mobilise fiscal or monetary
policy to manage the negative effects of external economic or financial market influences.
This list of indicators is not meant to be exhaustive; many factors ultimately determine a sovereigns
vulnerability to external shocks and capacity to maintain debt servicing in the face of adverse external
conditions. Nor is it meant to be a substitute for a holistic assessment of sovereign creditworthiness;
many other factors affect a sovereigns credit quality and influence the rating we assign to its debt
securities, as discussed in our Sovereign Bond Methodology.
1

Key indicators of external vulnerability
Current account balance: The current account (when in deficit) gives an indication of how
much foreign capital a country requires in order to close the gap between domestic savings and
investment. Rapidly growing emerging market countries with high investment rates can sustain
large current account deficits for many years against the background that a strengthening
economic base improves a countrys ability to service growing external debt. Large and
persistent current account deficits lead to a build-up of external debt if not financed by inflows
of foreign direct investment (FDI).
Reliance on debt funding by non-residents to meet current account shortfalls exposes emerging
markets to potential balance of payments crises if investor sentiment changescurrent account
imbalances can lead non-resident (and also resident) investors to flee from domestic-currency
assets, triggering massive exchange rate and/or asset price depreciation, the precursor to
banking sector and wider economic crises.
Though each country is unique in its ability to finance a current account deficit, our view is
that a current account deficit in excess of 5% of GDP represents elevated vulnerability to
balance of payments risk (an element of the external vulnerability risk sub-factor within our
assessment of sovereign susceptibility to event risk (Factor 4 in our Sovereign Bond
Methodology)). This threshold roughly equates to one standard deviation from the mean
current account balance of all sovereigns examined within this report.
Indicator of external
vulnerability
Minimal vulnerability,
considerable flexibility
Moderate vulnerability,
moderate flexibility
Elevated vulnerability,
diminished flexibility
Current account balance
(2014F, % GDP)
CAD<2% 2%<CAD<5% CAD>5%

External Vulnerability Indicator (EVI): This ratio measures short-term external debt +
currently maturing long-term debt + non-resident deposits over one year as a proportion of
official foreign exchange reserves. It is an indicator of whether a countrys immediately
available foreign exchange reserves are sufficient to allow it to make all external payments, even
if there is a complete refusal of creditors to roll over debt due within a given year. (Non-
resident deposits in domestic banks with a maturity of greater than one year are included

1
See Sovereign Bond Methodology, 12 September 2013

4 MARCH 25, 2014


because, in a general run on the currency, non-resident depositors may attempt to withdraw
longer-term deposits even if they have to pay a penalty to do so; deposits of less than one year
are already included in short-term debt.) This ratio thus measures capacity to withstand a
sudden loss of investor confidence resulting from heightened risk perception or a general
emerging market liquidity squeeze.
An EVI greater than 100% can be a signal of vulnerability, resulting either from excessive
short-term debt or a serious bunching of repayments on long-term debt, possibly exacerbated
by insufficient reserves. This equates to the threshold between M- and L+ in the external
vulnerability risk sub-factor within our assessment of sovereign susceptibility to event risk
(Factor 4 in our Sovereign Bond Methodology). An EVI above 160% equates to high
susceptibility to event risk in our methodology. (The detailed composition of short-term debt
must also be considered, as some emerging markets that are major commodity exporters may
have a high volume of trade-related short-term debt that is not vulnerable to withdrawal to the
same degree as other sorts of external financing.)
vulnerability
External Vulnerability
indicator* (2014F)
EVI<100% 100%<EVI<160% EVI>160%
* (Short-term External Debt + Currently Maturing Long-Term Debt + Nonresident Deposits Over One Year)/ Official Foreign Exchange
Reserves
Gross Borrowing Requirement: Gross borrowing requirements depict the size of the sovereigns
funding needs, mainly comprising the budget deficit and upcoming debt redemptions.
Although each sovereign is unique in its capacity to borrow, in general a government with large
financing requirements is more vulnerable to facing disruption of its capacity to service debt
and roll over maturing debt when faced with adverse external shocks such as a deterioration in
the terms-of-trade, a political crisis, a decline in demand in a major export market, a change in
country-specific risk perception, or a rise in international interest rates.
We consider governments with annual gross borrowing needs in excess of 20% of GDP to be
susceptible to liquidity risk, which equates to the threshold between M- and L+ in the
government liquidity risk sub-factor within our assessment of sovereign susceptibility to event
risk (Factor 4 in our Sovereign Bond Methodology). Gross borrowing requirements below
7.5% of GDP is considered very low government liquidity risk in our methodology.
vulnerability
Gross borrowing
requirement (2014F, %
of GDP)
GBR<7.5% 7.5%<GBR<20% GBR>20%

Government foreign currency debt / Total general government debt: General government
foreign-currency (and foreign-currency-indexed debt) measures the extent to which central and
subnational governments in each country have recourse to issuing in currencies other than
their own (or the indexing domestic-currency debt to the exchange rate): a high ratio of
foreign-currency denominated debt as a proportion of total debt often reflects either a lack of a
domestic-currency securities market capable of absorbing government debt or a lack of investor
confidence in the domestic currency resulting from high risk of inflation.

5 MARCH 25, 2014


General government foreign currency debt/general government debt is an adjustment factor
within our assessment of fiscal strength (Factor 3 of our Sovereign Bond Methodology). For
the purposes of this report, we highlight instances where foreign-currency denominated debt
constitutes more than 40% as a proportion of total debt as a source of potential debt-servicing
stress in the event of major exchange rate adjustment even when other measures of
indebtedness may appear low. This threshold roughly equates to one standard deviation from
the mean proportion of foreign currency debt of total debt for all sovereigns examined within
this report.
vulnerability
General Govt. Foreign
Currency Debt / Total
Govt. Debt (%) (2014F)
FC<20% 20%<FC<40% FC>40%

Indicators of sovereign policy space
CPI inflation: Inflation, most commonly measured by the change in price level of a basket of
commonly consumed items (the Consumer Price Index, or CPI), is primarily an input into our
assessment of sovereign creditworthiness as an indicator of policy credibility and effectiveness
(Factor 2: Institutional Strength). Sustainable economic growth and prosperity are best
achieved with price stability. High inflation and inflation volatility erode confidence in the
function of the domestic currency as a store of value, which can contribute to capital flight and
currency crisis.
It is also a measure, however, of policymakers capacity to respond to adverse external shocks: it
is a proxy for the scope and capability of a central bank to intervene in the financial system
during a crisis. A low-inflation environment allows a central bank to tolerate a greater amount
of depreciation (or diminish the degree of intervention required to curb depreciation) without
fear of a depreciation-induced rise in inflation. A low-inflation environment lessens the need
for direct intervention in the foreign exchange market (i.e. limit the depletion of foreign
exchange reserves) or reduce the degree of (growth-depressing) monetary tightening required to
curb depreciation, thus limiting the impact on sovereign creditworthiness.
In our view, inflation below 5% is low and conducive to a central bank having considerable
monetary policy and exchange rate policy flexibility during periods of adverse external
conditions. In contrast, double-digit inflation severely constrains policymakers use of
monetary policy (aligning with a M- sub-factor score for policy credibility and effectiveness in
our assessment of Institutional Strength, Factor 2 in our Sovereign Bond Methodology), which
roughly equates to one standard deviation from the mean inflation rate for all sovereigns
examined in this report.
Indicator of policy space Minimal vulnerability,
CPI Inflation y-o-y
(2014F)
CPI<5% 5%<CPI<10% CPI>10%

General government debt/GDP: This measure is aimed at assessing the sustainability of an
increase in the governments existing debt burden in case additional fiscal resources are needed in
the event of an adverse shock, e.g. when an increase in government spending is required to
stimulate growth to compensate for weaker external demand, or support needs to be provided to

6 MARCH 25, 2014


ailing banking systems in response to tightened global liquidity conditions. In contrast, a legacy
of heavy indebtedness can constrain a governments ability to respond to external shocks, forcing
a government to tighten fiscal policy to avoid further debt accumulation. Considering the stock
of general government debt also provides an indication of the degree to which past debt
accumulation is susceptible to changes in the interest rate paid on maturing government debt to
be rolled over, exposing the government to changes in investor sentiment and risk premia.
General government debt as a proportion of gross domestic product is a standard measure for
scaling the size of general government debt (the debt of the central and subnational governments)
to the size of the economy for cross-country comparative purposes. Although 40% equates to the
mean debt-to-GDP level for all sovereigns examined in this report, market tolerance and investor
willingness to rollover debt above this level is lower for emerging market sovereigns. We consider
a debt level in excess of 60% of GDP (equating to roughly one standard deviation from the mean
of sovereigns examined in this report) to represent significantly increased vulnerability for
emerging market sovereigns, constraining their ability to use fiscal policy to manage adverse
shocks. (This aligns to a M sub-factor score for debt burden in our assessment of Fiscal Strength,
Factor 3 in our Sovereign Bond Methodology.)
Indicator of policy space Minimal vulnerability,
General govt. debt/GDP
(2014F)
Debt <40% 40%<Debt<60% Debt>60%

7 MARCH 25, 2014


Individual Emerging Market Sovereign Exposures, Vulnerabilities, Mitigants and
Credit Supports
Emerging markets have experienced considerable financial market volatility over the past nine months
in anticipation of, and following the commencement of, the US Federal Reserves unwinding of
extraordinary monetary stimulus (so-called tapering of its quantitative easing policy). The recent
bout of financial market volatility earlier this year was exacerbated by emerging market growth
concerns sparked by weakening Chinese manufacturing data.
The continuing global capital reallocation has driven considerable exchange rate depreciation in recent
months (see Exhibit 2) and rises in market yields, particularly in those emerging markets that were the
recipients of large amounts of foreign capital inflows during the quantitative easing period, such as
Turkey and South Africa. Others such as Ukraine, Argentina and Venezuela have come under greater
pressure, underscoring a diversity of vulnerabilities and exposures beyond just external factors and
differentiation by the market regarding its assessment of individual sovereigns inherent mitigants to
vulnerability and credit supports.
EXHIBIT 2
Emerging Market Currencies Under Pressure
Exchange rate movements to the US dollar, year to date

Source: Haver Analytics

We expect emerging market countries with external imbalances, reliance on external funding and weak
policy frameworks to be those most vulnerable to sentiment changes, capital flow adjustments or
disorderly market reactions as the monetary normalisation process continues and growth expectations
fluctuate with the latest data.
The following pages provide a snap-shot of external vulnerabilities for the largest emerging market
sovereignsone element of our holistic assessment of sovereign creditworthiness. The individual
sovereign-specific sections also highlight key credit mitigants that support credit quality and provide
sovereigns with varying capacity to manage financial and economic shocks.
-24 -20 -16 -12 -8 -4 0 4 8 12
Ukraine
Argentina
Russia
Hungary
Turkey
South Africa
Colombia
China
Korea
Philippines
Mexico
Poland
Malaysia
Peru
Chile
Czech
Venezuela
Thailand
India
Brazil
Indonesia

8 MARCH 25, 2014


Argentina: Haphazard Policymaking and Unreliable Statistics Undermine
Confidence in Capacity to Manage Adverse Shocks

Current account
balance
(2014F, % of GDP)
indicator* (2014F)
Gross borrowing
requirement
(2014F, % of GDP)
Govt. Foreign Currency
Debt/ Total Govt.
Debt (%)
CPI Inflation
(2014F, % y.o)
General govt. debt
(2014F, % of GDP)
Argentina
(Caa1 stable)
-0.8% 101.1% 5.7% 62.0% 30.0% 48.5%
* (Short-term External Debt + Currently Maturing Long-Term Debt + Nonresident Deposits Over One Year)/ Official Foreign Exchange Reserves

External vulnerabilities/exposures: Argentinas (Caa1 stable) currency declined more than 17%
against the US dollar in the space of a week in January after the Argentine central bank limited its
intervention in the market to preserve its international reserves.
2
Official government reserves have
plummeted to less than $30 billion from $52 billion in mid-2011, as a result of the countrys growing
macroeconomic imbalances and which has pressured the sovereigns creditworthiness (see Exhibit 1).
Argentina remains one of the few Latin American countries with a capital account deficit because of
persistent outflows and a lack of access to international debt markets, a symptom of macroeconomic
distortions, haphazard policymaking and past debt repayment transgressions. The trade surplus (goods
and services), which for years helped prop dollar inflows, fell 50% in the first nine months of 2013
from 2012 levels (see Exhibit 2). Meanwhile, Argentina has one of the highest inflation rates among
our rated sovereigns (well in excess of the official figure reported by the government), and continued
currency depreciation will likely push inflation even higher to more than 30% this year.
EXHIBIT 1
Declining Foreign Exchange Reserves Pressures
Creditworthiness
International Reserves (US$ Billions)

Source: Central Bank of Argentina
EXHIBIT 2
Argentina's Declining Trade Surplus

Trade Balance Seasonally Adjusted

Source: Haver Analytics; Instituto Nacional de Estadistica y Censos (INDEC)

Mitigants/credit supports: Argentina has relatively low dependence on external capital flows, having
been essentially shut out of global capital markets for more than a decade. So it is less vulnerable to
reversals in global investor sentiment. Argentina also has a relatively modest and improving debt
burden: government debt as a proportion of GDP is just over 40% and the sovereigns debt to
revenues ratio has been improving faster than its rating peers. Argentinas GDP per capita is also more
than three times the median of B-rated sovereigns and its economy larger and more diversified than its
peer group. However, the countrys haphazard economic policy decisions coupled with increasing

2
See Argentina Devaluation Is Credit Negative for Banks, Corporates, Insurers and Securitizations and No Sovereign Panacea, 27 January 2014
4
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9 MARCH 25, 2014


questions about the reliability of official statistics make it extremely difficult to determine with
certainty Argentinas real economic conditions. This diminishes confidence that regarding the
countrys ability to manage adverse shocks such as the current pressure on emerging market currencies,
as reflected in Argentinas Caa1 rating.
For further information: Credit Opinion: Argentina, Government of
Gabriel Torres
Vice President - Senior Credit Officer
+1.212.553.3769
gabriel.torres@moodys.com

10 MARCH 25, 2014


Brazil: Strong Resilience to External Shocks, Despite Rising Debt Levels and
Below-Trend Growth

Current account
balance
(2014F, % of GDP)
indicator* (2014F)
Gross borrowing
requirement
(2014F, % of GDP)
Govt. Foreign
Currency Debt/
Total Govt. Debt (%)
CPI Inflation
(2014F, % y.o)
General govt. debt
(2014F, % of GDP)
Brazil
(Baa2 stable)
-3.0% 24.0% 12.5% 5.0% 5.7% 61.9%
* (Short-term External Debt + Currently Maturing Long-Term Debt + Non-resident Deposits Over One Year)/ Official Foreign Exchange Reserves

External vulnerabilities/exposures: Brazil (Baa2 stable) has a limited exposure to a reversal of portfolio
inflows after attracting net flows equivalent to just 4.8% of GDP during 2010-2012. The countrys
international reserve buffer is among the strongest of the five large Latin American economiesBrazil,
Mexico, Chile, Peru and Colombiaproviding strong resilience to external shock despite relatively
high public debt ratios and persistent inflation. The governments debt ratio is projected to rise to
around 60% of GDP, significantly higher than the 45% median for Baa-rated peers (see Exhibit 1),
and its annual gross borrowing requirement is higher than many other Baa credits. Meanwhile, the
central bank raised the benchmark Selic rate for a sixth consecutive time to 10.5% to control
inflationary pressures. All of this is occurring against the backdrop of an extended period of below-
trend growth, with GDP expanding around 2% in 2011-14a marked slowdown from average
annual growth of 4.8% between 2004 and 2008 (see Exhibit 2). The Brazilian real depreciated 13%
against the dollar in 2013.
EXHIBIT 1
Brazils Rising Debt Level
General government debt, % of GDP


52
53
54
55
56
57
58
59
60
61
62
2004 2005 2006 2007 2008 2009 2010 2011 2012 2013E
%

11 MARCH 25, 2014


EXHIBIT 2
Brazils Growth Slows
Real GDP growth, %

Source: Banco Central do Brasil; Moodys Investors Service

Mitigants/credit supports: Despite an anticipated increase in the current account deficit to around
3% of GDP in 2014, the external accounts do not pose significant credit risks. The bulk of the deficit
continues to be financed by foreign direct investment. With international reserves equivalent to 16%
of GDP, the government has more than sufficient resources to cover external financial obligations and
to provide bridge liquidity to domestic borrowers, even if markets were to shut down. Short-term
external debt is low at just 1.5% of GDP, foreign currency-denominated debt accounts for a mere 5%
of total government debt, and non-residents hold only 16% of the governments domestic debt.
For further information: Credit Opinion: Brazil, Government of
Mauro Leos
+1.212.553.1947

-1.0
0.0
1.0
2.0
3.0
4.0
5.0
6.0
7.0
8.0
2004 2005 2006 2007 2008 2009 2010 2011 2012 2013E 2014F
%
Real GDP growth Ave. 2004-2008 Ave. 2011-14 avg 2004-14
Avg 2004-14: 3.5%
Avg 2004-08: 4.8%
Avg 2011-14: 1.9%

12 MARCH 25, 2014


Chile: Very Low Vulnerability to External Shocks Due to Low Debt Levels, Fiscal
Strength

Current account
balance
(2014F, % of GDP)
indicator* (2014F)
Gross borrowing
requirement
(2014F, % of GDP)
Govt. Foreign
Currency Debt/
CPI Inflation
(2014F, % y.o)
General govt. debt
(2014F, % of GDP)
Chile
(Aa3 stable)
-3.8% 126.9% 2.1% 17.4% 2.8% 11.9%
* (Short-term External Debt + Currently Maturing Long-Term Debt + Nonresident Deposits Over One Year)/ Official Foreign Exchange Reserves)

External vulnerabilities/exposures: Chiles (Aa3 stable) external vulnerabilities stem from an elevated
current account deficit and dependence on commodity exports, though neither represents a significant
risk. The recent decline in global metal prices, investment income outflows and resilient domestic
demand have led to a deterioration in the current account balance; the deficit is estimated at 3.8% of
GDP this year from a surplus of 2% in 2009. However, foreign direct investment inflows are sufficient
to finance most of the current account shortfalls, similar to other Latin American countries (see
Exhibit). Official foreign exchange reserves are estimated at $43.9 billion in 2014, producing an
external vulnerability indicator (EVI) in excess of 100% -- a figure associated with moderate external
vulnerability.
While the free-floating Chilean peso can act as a natural hedge against external shocks, its high
correlation with international copper prices can lead to moderate levels of volatility in the exchange
rate. Commodities represent around 80% of Chiles exports, with the bulk being copper sales.
Nevertheless, the Chilean peso has remained essentially unchanged against the US dollar in the past
month, underscoring minimal external vulnerability.
EXHIBIT 1
Chiles Current Account Deficit Covered by Foreign Direct Investment
Current account deficit, FDI, 2010-12 average


Mitigants/credit supports: Chiles low debt levels, low interest-rate burden and net creditor position
provide it with a very high degree of insulation from external vulnerability. A debt-to-GDP ratio of
11.9% for 2014 is less than half of the Aa-rated peers median. Chiles debt structure is also highly
favorable; the average maturity is over 10 years, rollover risk is low and foreign-currency denominated
debt has declined to just 17% of total debt in 2013 from 90% of the total in 2003. Chiles EVI is
expected to improve to 126.9% in 2014 from 147% in 2008, while potential multilateral lending
0.0
1.0
2.0
3.0
4.0
5.0
Mexico Chile Brazil Peru Colombia
%

o
f

G
D
P
Current Account Deficit Foreign Direct Investment

13 MARCH 25, 2014


provides a cushion in addition to foreign exchange reserves in the event of a sudden stop of private
capital inflows. Meanwhile, substantial fiscal savings and a budget deficit of a mere 0.5% of GDP
provide the government sufficient financing options to manage internal and external shocks.
For further information: Credit Opinion: Chile, Government of
Gabriel Torres
+1.212.552.3769

14 MARCH 25, 2014


China: Capital Controls, Strong External Balance Sheet Insulate Sovereign and
Economy from External Financial Shocks

Current account
balance
(2014F, % of GDP)
indicator* (2014F)
Gross borrowing
requirement
(2014F, % of GDP)
Govt. Foreign
Currency Debt/
CPI Inflation
(2014F, % y.o)
General govt. debt
(2014F, % of GDP)
China
(Aa3 stable)
+1.9% 16.5% 6.2% 1.2% 3.5% 34.2%

External vulnerabilities/exposures: Chinas (Aa3 stable) external position is exceptionally strong: a
robust current account surplus and strong capital controls insulate economy and reduce financial
system vulnerability to global financial market disturbances. The current account has averaged a
surplus of around 2% of GDP over the past four years (the sharp reduction from the 10.1% of GDP
current account surplus in 2007 reflected rebalancing prompted by external demand changes and
domestic policies), while Chinas positive net international investment position ensures an income
inflow into the balance of payments that offset turbulence in trade performance or financial flows that
transcend capital controls. While banking system credit growth has moderated from the surge in 2009,
credit growth in the shadow banking system has boomed representing a potential domestic
vulnerability. Nonetheless, we see that the banking system has substantial buffers to absorb possible
credit costs, either indirectly or directly, from a deterioration in shadow banking system credit quality.
The central government runs a modest budget deficit; central plus local government gross financing
requirements (budget deficit financing and debt repayment or rollover) have been edging up in recent
years, but the total amount remains relatively modest (less than 8% of GDP). We expect the
government to run modest deficits around 2% of GDP over the medium term.
EXHIBIT 1
Strong External Balance Sheet Provides Significant Buffer
Net International Investment Position (2012)

Source: Moodys Investors Service, Haver

Mitigants/credit supports: Neither the government nor the banking sector relies on external funding.
Chinas net international investment position was about 21% of GDP in 2012 (see exhibit), one of the
strongest sovereign positions in our rated universe of large economies. Official foreign exchange
reserves totalled $3.82 trillion at end-December 2013. The banking systems loan-to-deposit ratio is
relatively low at around 70%. Net foreign assets increased in 2012 to $300 billion (3.7% of GDP)
-150 -100 -50 0 50 100
Portugal (Ba3)
Ireland (Baa3)
Greece (Caa3)
Spain (Baa2)
Italy (Baa2)
United States (Aaa)
France (Aa1)
Korea (Aa3)
China (Aa3)
Germany (Aaa)
Japan (Aa3)
% of GDP

15 MARCH 25, 2014


and the banks enjoy extraordinary back-up external liquidity from the countrys official foreign
exchange reserves. Chinas gross domestic savings rate50.7% in 2012, the highest of any large
economyis also a source of near-term credit strength, providing the government with a stable, low-
cost domestic source of funding.
Furthermore, policy space is ample: inflation remains low affording considerable flexibility to the
central bank and central government debt measures a relatively modest 34.2% of GDP providing
headroom to manage economic or financial shocksalthough the central government may need to
provide additional fiscal resources to local governments to bolster their finances and debt-repayment
capacity after sizeable debt and contingent liability accumulation in the past few years,
3
representing a
sizeable contingent liability for the sovereign balance sheet that would increasing this key credit ratio if
crystallised.
For further information: Credit Opinion: China, Government of
Tom Byrne
+65.6398.8310
David Erickson
Associate Analyst
+65.6398.8334
david.erickson@moodys.com

3
See New Report Shows Sizable Debt Accumulation by China's Local Governments, a Credit Negative, 3 January 2014

16 MARCH 25, 2014


Colombia: Adequate Financial Buffers, Coherent Economic Policies Mitigate
Negative Spillovers

Current account
balance
(2014F, % of GDP)
indicator* (2014F)
Gross borrowing
requirement
(2014F, % of GDP)
Govt. Foreign
Currency Debt/
CPI Inflation
(2014F, % y.o)
General govt. debt
(2014F, % of GDP)
Colombia
(Baa3 positive)
-3.4% 60.0% 6.2% 25.2% 3.1% 32.4%

External vulnerabilities/exposures: Colombias (Baa3 positive) currency has depreciated 1.4% against
the US dollar since the start of the year, more than many other emerging market currencies, indicating
potential balance-of-payments pressures and a reversal of portfolio inflows. External vulnerability stems
partly from a current account deficit averaging around 3.1% of GDP for 2010-2012, implying a
reliance on foreign financing to achieve balance of payments. Cumulative net portfolio flows into
Colombia during 2010-12 totalled 3.7% of GDPless than some other Latin American economies
but suggesting some exposure to a reversal in capital flows. The countrys dependence on oil exports as
its main source of foreign revenue also renders it susceptible to shocks in oil prices in the event of a
global economic slowdown.
EXHIBIT 1
Rising Reserves Reduce External Vulnerability
Official Foreign Exchange Reserves (US$ Bil.)

Source: Haver Analytics Central Bank of Colombia

Mitigants/credit supports: Diminishing Colombias external vulnerability are its foreign-exchange
reserves, which more than doubled to $35 billion (9.4% of GDP) between 2005 and 2012, sufficient
to cover short-term external debt and maturing long-term principal payments and produce an EVI
well below 100% (see Exhibit 1). Debt-to-GDP has improved faster than similarly rated countries:
central government debt is forecast to fall to 32.4% of GDP this year from 43% in 2003 and debt-to-
revenues ratio will drop to 197.5% from 324% in the same period, implying considerable policy space.

0.0
5.0
10.0
15.0
20.0
25.0
30.0
35.0
40.0
45.0

17 MARCH 25, 2014


The central bank also has the capacity to stimulate the economy through interest rates given a
moderate inflation rate should external financing suddenly dry up. The key interest rate has been
maintained at 3.25% for 10 straight months. More generally, coherent and predictable
macroeconomic policies, an impeccable debt-servicing track record and ample access to financing in
domestic markets provide credit support. We expect growth will accelerate to 4.5% this year from 4%
in 2013.
For further information: Credit Opinion: Colombia, Government of
Gabriel Torres
+1.212.552.3769

18 MARCH 25, 2014


Czech Republic: Ample Liquidity, Floating Exchange Rate Keep External
Vulnerabilities in Check

Current account
balance
(2014F, % of GDP)
indicator* (2014F)
Gross borrowing
requirement
(2014F, % of GDP)
Govt. Foreign
Currency Debt/
CPI Inflation
(2014F, % y.o)
General govt. debt
(2014F, % of GDP)
Czech Republic
(A1 stable)
-1.5% 92.1% 10.2% 20.0% 1.3% 50.5%

External vulnerabilities/exposures: The Czech Republics (A1 stable) current account deficit is driven
by a negative income balance that reflects the repatriation and reinvestment of accrued profits on the
existing stock of inward direct investment, a common theme for countries that attract large amounts of
foreign direct investment (FDI). Non-resident holdings of government debt are relatively low, and
external debt issuance plays a purely complementary role in the sovereigns funding strategy given that
the bulk of financing comes from domestic debt issues. Although yields on domestic and external
issuance have increased marginally in recent weeks, the overall cost of funding remains low, reinforcing
the perception of the Czech sovereign as a regional safe haven in Central and Eastern Europe.
Nevertheless, the economy remains fairly undiversified and its high degree of openness leaves it
exposed to fluctuations in external demand.
Mitigants/credit supports: Liquidity and external debt-servicing vulnerabilities remain low. The
External Vulnerability Indicator (EVI) remains below 100%, reflecting an adequate reserve cushion
that mitigates foreign-exchange risks and a favourable external debt structure for all sectors of the
economy. Short-term external debt represents approximately one-quarter of total external debt, while
public sector external indebtedness accounts for less than 40% of the total, limiting the sovereigns
exposure to volatility in non-resident funding. A deep, albeit underdeveloped, domestic capital market
provides ample funding and insulates the sovereign from external financial market volatility.
Moreover, fiscal policy credibility remains a key credit strength, reflecting the sovereigns progress
toward narrowing the fiscal imbalance despite a very challenging economic and political environment.
EXHIBIT 1
Stable Yields Post-tapering Reflect Regional Safe Haven Status
Czech Republic sovereign yield curve, %

Source: Bloomberg

0.0
0.5
1.0
1.5
2.0
2.5
3.0
3.5
4.0
4.5
3mo 6mo 9m 1Y 2Y 3Y 4Y 5Y 6Y 7Y 8Y 9Y 10Y 15Y 25Y 50Y
%
2/19/2014 2/19/2013

19 MARCH 25, 2014


Loan growth relies on deposit-funded domestic credit rather than bank lending financed through
external indebtedness. The countrys financial sector remains healthy with very low risk of shocks that
could adversely affect the sovereigns balance sheet. Meanwhile, the flexible exchange-rate regime
serves as an important shock-absorption mechanism. These characteristics limit the sovereigns
exposure to potential damage stemming from a sudden stop, while well-anchored inflation
expectations, an affordable debt burden and moderate debt ratios provide policy space to manage
economic and financial shocks.
For further information: Credit Opinion: Czech Republic, Government of
Jaime Reusche
Vice President - Senior Analyst
+1.212.553.0358
jaime.reusche@moodys.com

20 MARCH 25, 2014


Hungary: Structure and Size of Debt, Large Financing Needs and Policy
Unpredictability Present Risks

Current account
balance
(2014F, % of GDP)
indicator* (2014F)
Gross borrowing
requirement
(2014F, % of GDP)
Govt. Foreign
Currency Debt/
CPI Inflation
(2014F, % y.o)
General govt. debt
(2014F, % of GDP)
Hungary
(Ba1 negative)
+1.5% 158.6% 23.1% 49.5% 2.4% 79.7%

External vulnerabilities/exposures: Hungarys (Ba1 negative) high government debt, estimated at 80%
of GDP for 2013, as well as the structure of the debt expose the sovereign to shifts in investor
sentiment. Although general government debt has stabilised, its trajectory remains uncertain as the
economy is only slowly emerging from an extended period of low growth and remains quite
susceptible to currency weakness. Exacerbating external vulnerabilities is the governments large
refinancing needs, which reflect the relatively shorter duration of borrowing that it has access to. In
2013, its gross borrowing requirement of 20 billion was equivalent to 21% of GDP, significantly
higher than its regional peers in Central and Eastern Europe. Foreign-currency refinancing risks are
also reflected in a moderately high external vulnerability indicator (EVI), which at nearly 160% of
foreign exchange reserves in 2013 compares less favourably than the Ba peer average.
EXHIBIT 1
Hungary has the Largest Gross Borrowing
Requirement Among Regional Peers
% of GDP, 2013

Source: Official National Sources, Moodys
EXHIBIT 2
Almost Half of Outstanding Forint Debt is Owned
by Foreign Investors
[1]

% of GDP

[1]
excludes T-bills
Source: AKK, Moodys

The share of domestic debt held by foreigners increased to 45.3% of total domestic debt by end-
August 2013, from an already-high 35% pre-2008 average. While this in part reflects the increase in
global liquidity and availability of capital for emerging markets, these investors tend to be less sticky
than domestic long-term investors, and as a result are much more susceptible to capital flight during
external shocks. Meanwhile, 40.9% of outstanding debt was denominated in foreign currency as of
2012 (compared to the Ba1 median of 33.9%), rendering Hungary vulnerable to exchange-rate
movements.
0
2
4
6
8
10
12
14
16
18
20
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(
B
a
1
)
0% 20% 40% 60% 80% 100%
National Bank of Hungary Banks
Retail Insurance & pension funds
Investment funds Public sector
Others Foreign investors

21 MARCH 25, 2014


Mitigants/credit supports: Partly mitigating these external vulnerabilities, Hungarys current account
has been in surplus for four consecutive years, averaging +0.9% of GDP between 2010 and 2013
(reflecting trade surpluses resulting from the contraction in domestic demand and its consequent
compression on imports), reducing reliance on external funding to meet a savings-investment gap. We
expect this trend to continue, with the current account likely to reach a surplus of 1.5% of GDP in
2014. While foreign-currency liquidity metrics are currently favourable given current account
surpluses and high reserve levels, the large external debt stock and unpredictable policy environment
continue to expose the economy to shocks emanating from investor sentiment changes.
EXHIBIT 3
Current Account Surplus and Foreign Exchange Reserves Only Partly Mitigate External
Vulnerabilities
% of GDP

Source: National Bank of Hungary, Moodys

For further information: Credit Opinion: Hungary, Government of
Alpona Banerji
+44.20.7772.1063
alpona.banerji@moodys.com
0
5
10
15
20
25
30
35
40
-10
-8
-6
-4
-2
0
2
4
6
2004 2005 2006 2007 2008 2009 2010 2011 2012 2013F 2014F
Current Account Balance [LHS] Net FDI [LHS] Foreign Currency Reserves [RHS]

22 MARCH 25, 2014


India: Current Account Correction and Government Debt Profile Limit Sovereign
Exposure, But Political and Growth Uncertainty Underpin Capital Account
Volatility

Current account
balance
(2014F, % of GDP)
indicator* (2014F)
Gross borrowing
requirement
(2014F, % of GDP)
Govt. Foreign
Currency Debt/
CPI Inflation
(2014F, % y.o)
General govt. debt
(2014F, % of GDP)
India
(Baa3 stable)
-2.9%% 72.7% 12.0% 6.5% 9.0% 66.8%

External vulnerabilities/exposures: Indias (Baa3 stable) current account deficit, which widened to
4.7% of GDP in FY 2012/13, represents a vulnerability to global financial volatility. The deficit
declined to an estimated 0.9% of GDP in the latter months of 2013, as a combination of currency
depreciation and a global growth recovery spurred exports while controls on gold imports lowered the
import bill. But continued high inflation poses risks, as it lowers international competitiveness and
keeps demand for gold high such that any easing of controls will result in a widening of the current
account deficit again. Moreover, if the outcome of the national election in April/May 2014 heightens
policy uncertainty and erodes investor confidence, it could lead to capital outflows and renewed
pressure on the currency.
High inflation and already wide fiscal deficits limit the monetary or fiscal stimulus that can be applied
to revive GDP growth, which has decelerated significantly since 2011. Lower growth has reduced
domestic banks asset quality and profitability. Banking sector stress could exacerbate and prolong the
slowdown, which would then risk significant international capital outflows as well.
EXHIBIT 1
Low FC Exposure Insulates Government From
Exchange Rate Volatility
Govt. debt denominated in foreign currency, % (2012)

Source: Moodys
EXHIBIT 2
Long Tenors and Fixed Rates Insulates
Governments Effective Interest Costs
Average government debt maturity, years (2013)

Source: IMF, Moodys

Mitigants/credit supports: As was evident in 2013, Indian authorities are able to enlist a variety of
policy tools, including increased controls in some areas and liberalisation of controls in others, to stem
the adverse impact of international market volatility. Official foreign exchange reserves, equivalent to
around 17% of GDP, remain adequate to cover current account and external debt repayment needs.
0
10
20
30
40
50
60
70
80
90
100
L
a
t
v
i
a

(
B
a
a
2
)
B
u
l
g
a
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a

(
B
a
a
2
)
R
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(
B
a
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3
)
A
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(
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3
)
G
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(
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1
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(
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(
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3
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(
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3
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a

(
B
a
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3
)
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(
B
a
a
3
)
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a
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(
B
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2
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(
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(
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1
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(
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3
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(
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(
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(
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(
B
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e
s

(
B
a
a
3
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a

(
B
a
a
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(
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23 MARCH 25, 2014


Monetary policy has been assertive in addressing inflation, and if effective, it will keep a key source of
medium term growth and balance of payments risk in check.
Although the governments debt and annual financing needs are high, its debt structure benefits from
a robust domestic private savings rate and the statutory liquidity requirement for banks, which
mandates banks hold a certain level of government securities. As a result, government debt is owed
largely domestically, in rupees, at low real interest rates and relatively long tenors: Low foreign
currency exposure insulates the Indian government from exchange rate volatility associated with
changes in global liquidity and capital flows (see Exhibit 1); the governments debt contracted mostly
in long tenors and fixed rates insulates the governments effective interest costs from interest rate
spikes (see Exhibit 2).
For further information: Credit Opinion: India, Government of
Atsi Sheth
+1.212.553.4873
atsi.sheth@moodys.com

24 MARCH 25, 2014


Indonesia: Reliance on Foreign Funding Poses Risks, But Sizable Buffers and
Considerable Policy Space to Respond If Necessary

Current account
balance
(2014F, % of GDP)
indicator* (2014F)
Gross borrowing
requirement
(2014F, % of GDP)
Govt. Foreign
Currency Debt/
CPI Inflation
(2014F, % y.o)
General govt. debt
(2014F, % of GDP)
Indonesia
(Baa3 stable)
-3.1% 63.2% 3.7% 46.7% 5.8% 24.9%

External vulnerabilities/exposures: Despite a moderate debt burden and low financing requirements,
shallow local capital markets expose Indonesia (Baa3 stable) to foreign financing risk and the vagaries
of volatile financial markets. The governments reliance on external sources of funding has led to a
large proportion of its debt stock denominated in foreign currency; exchange rate volatility impairs
fiscal strength. The current account has shifted into structural deficitaveraging around 3% of GDP
for 2012-14from a surplus as recently as 2011. Meanwhile, the countrys moderately large negative
net international investment position reflects the economys overall reliance on external financing.
Nevertheless, the Indonesian government has continued to demonstrate access to international capital
markets even during periods of heightened risk aversion, underscoring its investment grade status.
The Indonesian rupiah has appreciated almost 7% against the US dollar since the start of the year.
EXHIBIT 1
Reliance on Foreign Funding Poses Risks for Indonesia
2012 General Government External Debt

Source: National sources, IMF-World Bank-BIS Quarterly External Debt Statistics, and Moodys Investors Service.

Mitigants/credit supports: Notwithstanding Indonesias reliance on external financing, Indonesias
debt profile continues to improve, mitigating currency and refinancing risks and supporting
creditworthiness. Since 2008, the share of foreign currency-denominated debt has fallen from over
52% to about 45%; the proportion of variable-rate debt has decreased from 22.9% to less than 18%;
while the government has increasingly shifted away from concessional sources of financing, from
43.2% to around 30% now.
0
10
20
30
40
50
60
70
80
%

o
f

G
e
n

G
o
v
t

D
e
b
t

25 MARCH 25, 2014


The combination of narrow fiscal deficits with a favourable maturity profile has also led to relatively
small gross financing requirements for the government: according to the IMF gross borrowing
requirements are extremely low at 4.0% of GDP for 2014 (compared with Brazil: 19.1%; South
Africa: 12.2%; Turkey: 11.0%; India: 12.2%). Meanwhile, policymakers emphasized stabilization with
a particular emphasis on containing the current account deficit following the first wave of volatility to
affect emerging markets in May of last year. This has resulted in relatively benign outcomes for
growth, the external payments position, and inflation in recent months.
The central banks foreign exchange reserves increased to $102.7 billion in February 2014, up from
the trough of around $93 billion reached in July 2013 and providing a sizable buffer against further
cross-border liquidity stress. In addition, Indonesias bond stabilization framework could help to
mitigate destabilizing capital outflows. These buffers provide a degree of resilience to funding shocks,
while Indonesias favourable fiscal and debt ratios provide considerable headroom to respond to
economic shocks: general government debt is low at less than 25% of GDP.
For further information: Credit Opinion: Indonesia, Government of
Christian de Guzman
+65.6398.8327
christian.deguzman@moodys.com

26 MARCH 25, 2014


Korea: Current Account Surplus and Strengthening Net International Investment
Position Reduces External Vulnerability

Current account
balance
(2014F, % of GDP)
indicator* (2014F)
Gross borrowing
requirement
(2014F, % of GDP)
Govt. Foreign
Currency Debt/
CPI Inflation
(2014F, % y.o)
General govt. debt
(2014F, % of GDP)
Korea
(Aa3 stable)
+4.2% 46.8% 0.6% 1.6% 2.8% 36.5%

External vulnerabilities/exposures: Koreas strong external position, relatively low level of government
foreign-currency denominated debt, and low domestic-currency external debt reduce vulnerability of
the governments balance sheet to global financial market turmoil and exchange rate volatility. Less
than 2% of total government debt is denominated in foreign currency. Meanwhile, supported by
competitive export industries, the current account has been in surplus every year following the 1997
Asian financial crisis (reaching a record high in 2013), and the International Investment Position (IIP)
continues to strengthen (Koreas net liability IIP shrank to 3% of GDP in December 2013, down
from 17.5% of GDP in December 2007).
EXHIBIT 1
External Vulnerability on a Declining Trend

EXHIBIT 2
Supported by Current Account Surpluses


However, Koreas key exposure to global financial market turbulence remains the banking systems
relatively high dependence on wholesale funding in foreign currencies. Although commercial banks
reliance on short-term off-shore funding has declined appreciably in the past five years, the overall
loan-to-deposit ratio remains above 100%, representing a sovereign credit exposure (105% in June
2013, down from a peak of 141% in December 2007).
Mitigants/credit supports: General government budget surpluses (including net receipts of social
security funds) have contributed to a very low gross financing need of only 0.7% of GDP in 2013, one
of the lowest of all advanced economies. Coupled with low government debt levels and well-anchored
inflation expectations, policymakers have considerable headroom to respond to economic shocks.
Meanwhile, Koreas large holdings of official foreign exchange reserves provide substantial resilience to
funding shocks: official international reserves reached $335.6 billion in December 2013 (equivalent to
28% of GDP), up substantially from the $200 billion level at the end of 2008. Korea has multilateral
and bilateral currency-swap arrangements in place to supplement its own foreign exchange liquidity
0
10
20
30
40
50
60
70
80
90
100
0
10
20
30
40
50
60
70
80
2
0
0
3
2
0
0
4
2
0
0
5
2
0
0
6
2
0
0
7
2
0
0
8
2
0
0
9
2
0
1
0
2
0
1
1
2
0
1
2
2
0
1
3
F
2
0
1
4
F
External Debt/CA Receipts (%) (LHS)
External Vulnerability Indicator (%) (RHS)
0
1
1
2
2
3
3
4
4
5
5
-20
-18
-16
-14
-12
-10
-8
-6
-4
-2
0
2
0
0
1
2
0
0
2
2
0
0
3
2
0
0
4
2
0
0
5
2
0
0
6
2
0
0
7
2
0
0
8
2
0
0
9
2
0
1
0
2
0
1
1
2
0
1
2
Net International Investment Position/GDP (%) (LHS)
Current Account Balance/GDP (%) (RHS)

27 MARCH 25, 2014


position: $38.4 billion of the regional Chiang Mai Initiative Multilateralizations (CMIM) $240
billion international reserve pool back-up would be available to Korea; the Bank of Korea also has a
$56 billion equivalent swap agreement with Chinas PBOC.
For further information: Credit Opinion: Korea, Government of
Tom Byrne
+65.6398.8310
David Erickson
Associate Analyst
+65.6398.8334
david.erickson@moodys.com

28 MARCH 25, 2014


Malaysia: Favourable Debt Structure, Minimal Currency Risk Mitigates High Public
Indebtedness

Current account
balance
(2014F, % of GDP)
indicator* (2014F)
Gross borrowing
requirement
(2014F, % of GDP)
Govt. Foreign
Currency Debt/
CPI Inflation
(2014F, % y.o)
General govt. debt
(2014F, % of GDP)
Malaysia
(A3 positive)
+4.3% 53.6% 10.3% 3.1% 2.8% 55.4%

External vulnerabilities/exposures: Malaysias (A3 positive) strong external position and large pool of
domestic savings limit vulnerability to external financial shocks. Nevertheless, net portfolio inflows
into Malaysia during 2010-2012 surpassed the accumulated total of the previous decade, representing
vulnerability to a sudden stop or reversal of these flows. The risk of consequent domestic interest rate
volatility in the event of a shock, however, is mitigated by ample onshore liquidity conditions that, in
turn, reflect a large pool of domestic savings equivalent to around 34% of GDP. Indeed, Malaysia
experienced a net outflow of portfolio investments in 2013 with only a limited impact on domestic
funding conditions.
Meanwhile, Malaysias fiscal deficits continue to be wider than A-rated peers, while the debt burden at
54.8% of GDP as of 2013 somewhat constrains policy space. The reliance of government revenue on
oil and gas receipts renders Malaysia vulnerable to adverse changes in emerging market energy demand
and commodity prices. Direct petroleum-related receipts equate to nearly one-third of total federal
government revenue.
Mitigants/credit supports: Capital market depth, the large buffer of foreign exchange reserves, and
favourable debt structure guard against a disruptive reversal of the non-resident accumulation of
Malaysian government debt. Malaysia has amassed a substantial foreign exchange reserve buffer over
the past decade totalling US$130.6 billion in February 2014, which has seen the External
Vulnerability Indicator (EVI) decline to around 50%, far lower than nearly 100% at end-1998. The
governments debt stock features a relatively long average term to maturity and is consequently less
susceptible to refinancing risks. Nearly two-thirds of the debt stock has residual maturities of three
years or more.
Moreover, the low proportion of government foreign-currency debt relative to the total debt stock
just 3.1% at end-2013 (see Exhibit 1)implies a very low exposure to exchange-rate risk, and the
fixed-rate and long-tenor of the debt ensure stability against fluctuations in government bond yields.

29 MARCH 25, 2014


EXHIBIT 1
Minimal Foreign-Currency Exposure Mitigates High Public Indebtedness
2013E Govt FC Debt/Total Govt Debt

Excludes euro area countries
Source: National sources and Moodys Investors Service

Malaysian Government Securities (MGS) held by foreigners rose to 42.8% at end-September 2013,
from 13.5% at end-2008. However, over this time, the government has shifted its financing mix
towards more shariah-compliant instruments called Government Investment Issues (GII); non-
residents hold only 1.6% of GII, and only 25.5% of the total local currency-denominated debt stock.
In addition, the enduring current account surplusalthough narrower than historical trendsand
large domestic institutional investor base suggests that the increased absorption of Malaysian
government securities (MGS) by foreign investors does not necessarily represent a heavy reliance on
external funding.
For further information: Credit Opinion: Malaysia, Government of
Christian de Guzman
+65.6398.8327
0
5
10
15
20
25
30
35
Malaysia (A3) Slovakia (A2) Israel (A1) Czech Republic
(A1)
A Median Mexico (A3) Baa1 Median Poland (A2)
%

o
f

G
e
n

G
o
v
t

D
e
b
t

30 MARCH 25, 2014


Mexico: Domestic Debt Orientation and Financial Buffers Limit External
Vulnerabilities

Current account
balance
(2014F, % of GDP)
indicator* (2014F)
Gross borrowing
requirement
(2014F, % of GDP)
Govt. Foreign
Currency Debt/
CPI Inflation
(2014F, % y.o)
General govt. debt
(2014F, % of GDP)
Mexico
(A3 stable)
+1.8% 60.0% 9.2% 18.5% 3.9% 31.0%

External vulnerabilities/exposures: Because Mexico (A3 stable) attracted substantial capital inflows
during the quantitative easing period, it is potentially exposed to a reduction or reversal of capital
flows. Cumulative net portfolio flows totaled 15.2% of GDP during 2010-2013 (compared with
5.8% for Peru, 4.8% for Brazil, 3.7% for Colombia and 0.4% for Chile), going mainly into fixed-
income instruments, i.e., government bonds. Mexico also has comparatively high short-term external
debt payments, double that of Brazil, representing about 20% of total external debt. About 40% of
the governments debt is external driven by increased non-residents debt holdings.
EXHIBIT 1
Mexico Received the Most Portfolio Inflows Amongst Latin Americas Largest Economies During the
QE Period
Cumulative net portfolio flows, 2010-12

Source: National central banks, IMF

Mitigants/credit supports: The country relies only partially on foreign portfolio inflows to finance a
moderate current account deficit which has averaged only 1% of GDP over the past five years.
Official foreign-exchange reserves are more than sufficient to cover maturing long-term plus short-
term external debt . At an estimated $180 billion as of mid-February (equivalent to 14% of GDP), the
level of reserves translates into an EVI of less than 60%. Further, close to 90% of domestic debt is
long-term, while 70% of funding for external debt came from the capital markets and 20% from
multilateral banks.
Additionally, sound macroeconomic policies also help to reduce the economys vulnerability to shocks.
A relatively moderate budget deficit implies the government has fiscal headroom to respond to
economic shocks. The recently approved Oil Fund will create additional fiscal buffers. Our expectation
13.3
5.8
4.8
3.7
0.4
Mexico Peru Brazil Colombia Chile
%

o
f

G
D
P

31 MARCH 25, 2014


of a gradual shift in GDP growth to the 3% to 4% range from 2% to 3% prior to recent reforms was a
key driver of our recent decision to upgrade Mexicos rating to A3 from Baa1.
4

For further information: Credit Opinion: Mexico, Government of
Mauro Leos
+1.212.553.1947

4
See Key Drivers for Moodys Decision to Upgrade Mexicos Sovereign Rating to A3 from Baa1, 10 February 2014

32 MARCH 25, 2014


Peru: Sizeable Foreign Exchange Reserves, Low Government Debt Burden Increase
Shock-Absorption Capacity

Current account
balance
(2014F, % of GDP)
indicator* (2014F)
Gross borrowing
requirement
(2014F, % of GDP)
Govt. Foreign
Currency Debt/
CPI Inflation
(2014F, % y.o)
General govt. debt
(2014F, % of GDP)
Peru
(Baa2 positive)
-5.0% 20.7% 1.3% 49.1% 2.5% 17.1%

External vulnerabilities/exposures: Although Peru (Baa2 positive) has a relatively low level of total
public debt, just under half of it is denominated in foreign currency. In addition, more than half of the
governments domestic currency debt is held by non-residents. The countrys current account has
deteriorated substantially in recent yearsPeru posted its first trade deficit in more than a decade in
2012. Meanwhile the highly dollarized economy and banking sector are vulnerable to exchange rate-
related risks. The central bank has intervened by selling foreign exchange reserves to limit downward
pressure on the Nuevo Sol, which depreciated 9% last year against the US dollar. Portfolio flows
(totaling net 5.8% of GDP during 2010-2012; see Exhibit) present a vulnerability to volatile investor
sentiment. Finally, due to a high share of the countrys exports is commodities, mainly copper and
gold, it is exposed to volatility in prices and waning global demand.
EXHIBIT 1
Peru Received Substantial Portfolio Inflows During the QE Period
Cumulative net portfolio flows, 2010-12

Source: National central banks, IMF

Mitigants/credit supports: Limited reliance on external bank lending and portfolio capital flows, along
with foreign exchange reserves of nearly $67 billion (equivalent to 30% of GDP) through the end of
August 2013, leave Peru well positioned to weather more challenging external financial conditions.
Peru received a net 16.1% of GDP in foreign direct investment (FDI) between 2010-2012, the highest
level among the five large Latin American economies. Despite a sizeable current account deficit
forecast to widen to nearly 5% of GDP this year from 3.6% in 2012FDI remains sufficient to
finance the current account gap. FX reserves cover almost 500% of its short-term external debt and
long-term debt maturities, generating one of the lowest EVI scores in the emerging market cohort and
indicating considerable financial shock absorption capacity.
13.3
5.8
4.8
3.7
0.4
Mexico Peru Brazil Colombia Chile
%

o
f

G
D
P

33 MARCH 25, 2014


In addition, the country has a very low government debt burdenless than 20% of GDP, down from
47% in 2003while fiscal surpluses in five of the past seven years suggest considerable policy space to
manage economic shocks. Propelled by strong private sector investment, the Peruvian economy has
displayed remarkable and enduring dynamism over the past decade with average annual growth of
nearly 6.5%. The economy is well positioned to continue growing at 5% to 6% annually if current
investment and mining prospects materialize.
For further information: Credit Opinion: Peru, Government of
Aaron Freedman
+1.212.553.4426
aaron.freedman@moodys.com
Jaime Reusche
+1.212.553.0358

34 MARCH 25, 2014


Philippines: Continuing Improvement in Philippines Debt Profile Helps Funding
Resilience

Current account
balance
(2014F, % of GDP)
indicator* (2014F)
Gross borrowing
requirement
(2014F, % of GDP)
Govt. Foreign
Currency Debt/
CPI Inflation
(2014F, % y.o)
General govt. debt
(2014F, % of GDP)
Philippines
(Baa3 positive)
+2.5% 29.3% 7.9% 34.3% 3.5% 40.9%

External vulnerabilities/exposures: The Philippines (Baa3 positive) financial account has registered
strong inflows since 2010 prompted by extraordinary monetary easing in advanced countries,
especially for portfolio investments. However, while subject to potential deceleration or reversal, these
capital flows do not pose as large a vulnerability as in other emerging markets. The persistence of the
current account surplus since 2003 provides a degree of resilience against external financial shocks,
supported by continued growth in overseas Filipino remittances and increasing receipts for services
exports. The banking system is also virtually immune to contagion from external shocks. It is largely
deposit-funded, aided in part by the steady flow of remittances, and exhibits a lack of dependence on
external funding and low exposure to the export sectorrepresenting a stable source of financing for
government debt and minimal contingent risks to the governments balance sheet. Underscoring the
Philippines limited vulnerability, the peso and Philippine government bond yields have remained
relatively stable through recent global market volatility.
EXHIBIT 1
Declining Foreign Currency Debt Reduces
Exposure
Foreign currency-denominated debt

EXHIBIT 2
Anchored Inflation Expectations, Lower Interest
Rates Have Enhanced Debt Affordability

Source: Bureau of the Treasury

Mitigants/credit supports: The Philippines external strengths are reflected in the falling external debt-
to-GDP ratio and the ample stock of gross international reserves, which now exceeds the countrys
total external debt. Although the Philippine government is among the largest sovereign issuer of US
dollar-denominated securities in the Asia-Pacific region, it met nearly all of its gross funding needs
through domestic sources in 2013, thereby reducing its foreign currency-denominated debt exposure
(see Exhibit 1). This reflects the countrys healthy external payments position and the ample liquidity
in its banking system. Credit support also come from a track record of narrow fiscal deficits, well-
30
35
40
45
2008 2009 2010 2011 2012 2013
%

o
f

N
a
t
i
o
n
a
l

G
o
v
t

D
e
b
t
4.5
5.5
6.5
7.5
10
15
20
25
2009 2010 2011 2012 2013
%
%

o
f

N
a
t
i
o
n
a
l

G
o
v
t

R
e
v
e
n
u
e
Int Payments (LHS) Avg Int Rates
Avg Foreign Rates Avg Domestic Rates

35 MARCH 25, 2014


anchored inflation expectations and a declining debt burden that implies considerable policy space to
manage the impact of unfavourable external financial or economic shocks.
Meanwhile, the structure of government debt continues to improve: the proportion of government
debt denominated in foreign currency continues to fall; well-managed inflation and favourable
liquidity conditions have contributed to lower interest rates that have enhanced debt affordability (see
Exhibit 2); the government is less indebted to non-residents (irrespective of currency denomination)
compared to its rating peers (see Exhibit 3), and is thus less susceptible to sudden stops or reversals of
capital flows; and the government also continues to proactively address refinancing risks by
lengthening the average maturity of its debt to around 10 years, from about seven years as of end-
2009.
EXHIBIT 3
Lower Foreign Funding Requirement Reduces Risks Relative to Peers
2012 General Government External Debt

Source: National sources, IMF-World Bank-BIS Quarterly External Debt Statistics, and Moodys Investors Service.

For further information: Credit Opinion: Philippines, Government of
Christian de Guzman
+65.6398.8327
0
10
20
30
40
50
60
70
80
%

o
f

G
e
n

G
o
v
t

D
e
b
t

36 MARCH 25, 2014


Poland: EU Funding and IMF Credit Line Underpin Sustainable External Payments
Position

Current account
balance
(2014F, % of GDP)
indicator* (2014F)
Gross borrowing
requirement
(2014F, % of GDP)
Govt. Foreign
Currency Debt/
CPI Inflation
(2014F, % y.o)
General govt. debt
(2014F, % of GDP)
Poland
(A2 stable)
-1.9% 136.4% 8.3% 36.1% 1.4% 50.5%

External vulnerabilities/exposures: Polands (A2 stable) external finances have been historically weaker
than those of A-rated peers given a recurring current account deficitthat averaged 4.9% of GDP in
2008-2012reflecting the persistent gap between domestic savings and investment, and the
economys domestic demand-dependant growth model. Dynamic growth has helped underpin
government finances despite fiscal deficits that averaged 5.6% of GDP in 2008-2012. Non-resident
holdings of domestic debt have increased substantially since the global financial crisis, reflecting
Polands regional safe haven status in Central and Eastern Europe, but exposing the sovereign to shifts
in investor sentiment or financial market volatility.
Mitigants/credit supports: Polands liquidity and external debt-servicing vulnerabilities are moderate.
Despite the reliance on external funding, current account deficits have narrowed substantially since
2012 (particularly in 2013 where we expect the current account deficit to have decreased to 1.6% of
GDP) and been mostly covered by broadly-sourced foreign direct investment averaging 2.5% of GDP
in 2003-2012 and large amounts of EU fund inflows. Although yields on domestic government debt
have risen marginally in recent weeks, an abrupt shift in non-resident sentiment is unlikely.
EXHIBIT 1
Substantial Current Account Adjustment in 2013
Cumulative current account deficit, billion

Source: National Bank of Poland and Moodys

-20.0
-16.0
-12.0
-8.0
-4.0
0.0
2013 2012 2011

37 MARCH 25, 2014


Stronger external finances following the notable narrowing of the current account deficit and
continued inflows of EU funds underpin Polands sustainable external payments position. In addition,
the risk of a sudden stop in external financing is mitigated by Polands fully floating exchange-rate
regime and the Flexible Credit Line (FCL) granted by the International Monetary Fund (IMF), both
of which support the sovereign credit profile. Despite Polands comparably low levels of foreign-
exchange reserves, the FCL serves as an anchor for market confidence and offers an efficient and cost-
effective allocation of resources, acting as an insurance policy that provides adequate financial coverage
even under extreme conditions or financial market volatility.
For further information: Credit Opinion: Poland, Government of
Jaime Reusche
+1.212.553.0358

38 MARCH 25, 2014


Russia: Low External Debt and Large Foreign Exchange Reserves Limit External
Vulnerability

Current account
balance
(2014F, % of GDP)
indicator* (2014F)
Gross borrowing
requirement
(2014F, % of GDP)
Govt. Foreign
Currency Debt/
CPI Inflation
(2014F, % y.o)
General govt. debt
(2014F, % of GDP)
Russia
(Baa1 stable)
+1.3% 22.6% 2.4% 20.7% 5.3% 14.6%

External vulnerabilities/exposures: Russias (Baa1 stable) total external debt to GDP ratio of around
35% in 2013 remains moderate in international comparison.
5
Banks have reduced their external
vulnerability since 2008 by building-up foreign assets to a larger extent than foreign debt which
resulted in a slight net external creditor position as of Q3 2013. While the corporate sector has
continued to accumulate external debt (also to a larger extent than external assets) in nominal terms,
its net external debt to GDP ratio declined to 9.5% as of Q3 2013 from 13% in 2007. While the
overall level of corporate external debt is still rather moderate at around 20% of GDP, this represents a
potential exposure for the sovereign. Furthermore, persistently large capital outflows from Russia have
led to an overall decline in FX reserves despite the current account surpluses last year.
Meanwhile, a sharp and prolonged drop in oil prices represents the key external vulnerability risk,
given the countrys high macroeconomic correlation (and government revenue correlation) to oil price
cycles. A low probability but potentially high impact event risk for Russias external liquidity situation
would be the imposition of severe economic sanctions against Russia in the context of the ongoing
stand-off with Ukraine, in particular if rolling over external debt were to be affected for a prolonged
period
Mitigants/credit supports: Russias external vulnerability is mitigated by its positive current account
balance, a very low external vulnerability indicator and Russias international creditor position implied
by a positive net international investment position. While Russias current account surpluses have
declined from 6% in 2008 to around 1.6% in 2013 and will, according to IMF projections, decline
further to 1.4% of GDP by 2015, this is not yet a cause of concern from a susceptibility to event risk
perspective.

5
The median debt level of Moodys rated countries in 2013 was 36% of GDP and the mean 49% of GDP.

39 MARCH 25, 2014


EXHIBIT 1
Russia benefits from significantly larger hard-
currency reserves than EM peer group
Foreign Reserve incl. gold (as % of GDP)

Source: Bloomberg, Haver
EXHIBIT 2
Russia boasts a strong current account balance
% GDP

Source: Bloomberg, Haver

Furthermore, Russias benefits from a cushion due to large foreign exchange reserves of around
US$456 billion at end 2013. While the foreign exchange reserves, which form the denominator of the
EVI index, are below pre-crisis levels implying a lower shock absorption capacity, the more flexible
exchange rate will reduce the potential drawdown on reserves in comparison to the pre-crisis period in
case of another sharp drop in oil prices.
For further information: Credit Opinion: Russia, Government of
Thorsten Nestmann
+49.69.70730.943
thorsten.nestmann@moodys.com
Russia
40
60
80
100
120
140
Q
1
/
2
0
0
8
Q
3
/
2
0
0
8
Q
1
/
2
0
0
9
Q
3
/
2
0
0
9
Q
1
/
2
0
1
0
Q
3
/
2
0
1
0
Q
1
/
2
0
1
1
Q
3
/
2
0
1
1
Q
1
/
2
0
1
2
Q
3
/
2
0
1
2
Q
1
/
2
0
1
3
Q
3
/
2
0
1
3
Indonesia Brazil Turkey
India Russia South Africa
-10
-8
-6
-4
-2
0
2
4
6
8
2
0
0
8

1
Q
2
0
0
8

2
Q
2
0
0
8

3
Q
2
0
0
8

4
Q
2
0
0
9

1
Q
2
0
0
9

2
Q
2
0
0
9

3
Q
2
0
0
9

4
Q
2
0
1
0

1
Q
2
0
1
0

2
Q
2
0
1
0

3
Q
2
0
1
0

4
Q
2
0
1
1

1
Q
2
0
1
1

2
Q
2
0
1
1

3
Q
2
0
1
1

4
Q
2
0
1
2

1
Q
2
0
1
2

2
Q
2
0
1
2

3
Q
2
0
1
2

4
Q
2
0
1
3

1
Q
2
0
1
3

2
Q
2
0
1
3

3
Q
Mexico Indonesia
Brazil Turkey
India Russia
South Africa

40 MARCH 25, 2014


South Africa: Manageable Debt and Low FC Exposure Lessen Vulnerability to
Rand Weakness

Current account
balance
(2014F, % of GDP)
indicator* (2014F)
Gross borrowing
requirement
(2014F, % of GDP)
Govt. Foreign
Currency Debt/
CPI Inflation
(2014F, % y.o)
General govt. debt
(2014F, % of GDP)
South Africa
(Baa1 negative)
-5.1% 84.1% 12.2% 7.9% 6.5% 45.9%

External vulnerabilities/exposures: South Africa (Baa1 negative) runs sizable twin deficits: the current
account deficit widened to 5.8% of GDP in 2013 and fiscal deficits have averaged in excess of 4% of
GDP since 2009. The export basket is heavily concentrated in commodities, which exposes the
economy to variations in global prices. Moreover, output and infrastructure constraints in particular
extremely tight energy supplies have limited the ability of export volumes to respond to upturns in
demand for almost a decade. The current account deficit is financed mainly with equity and portfolio
inflows, which slowed in the second half of 2013 and temporarily reversed with the start of the US
Federal Reserves QE tapering, contributing to a steep 24% cumulative depreciation of the rand
exchange rate against the US dollar between the end of April 2013 and mid-January.
EXHIBIT 1
Economys Foreign Currency Debt Exposure is Low (US$ billions)

Mitigants/credit supports: The impact of the rands weakness on the ability of the public and private
sector to service their foreign currency liabilities is limited because of the low level and relatively long
maturity structure of the countrys foreign currency debt. Unlike other countries with elevated current
account deficits, South Africas current account deficits are largely financed by non-debt-creating
portfolio inflows denominated in rand, i.e. non-resident purchases of local currency government bonds
and equities. At the end of September 2013, the countrys external debt denominated in foreign
currency totalled roughly 18% of GDP. Meanwhile, short-term debt, though equivalent to two-thirds
of FX reserves, has been extremely stable at around $20 billion for decades.
Even considering the large movements in the exchange rate since last year, the impact on the cost of
external debt service has been quite small. Net exports, meanwhile, are starting to respond to the
currency depreciation: the current account shrank to 5.1% in the fourth quarter of 2013 compared to
a downward-revised 6.6% in the third quarter. In the last two months, capital inflows have resumed
0
2
4
6
8
10
12
14
16
18
0
10
20
30
40
50
60
70
2004 2005 2006 2007 2008 2009 2010 2011 2012 2013H2
Public Sector Banks
Non-Banks Total FC Debt, % of GDP (RHS)
Private Sector FC Debt, % of GDP (RHS)

41 MARCH 25, 2014


and the currency has strengthened to under ZAR11/US$, reducing the cumulative depreciation since
April 2013 to around 19%.
For further information: Credit Opinion: South Africa, Government of
Kristin Lindow
Senior Vice President
+1.212.553.3896
kristin.lindow@moodys.com

42 MARCH 25, 2014


Thailand: Political Crisis Eroding Thailands Traditional Buffers

Current account
balance
(2014F, % of GDP)
indicator* (2014F)
Gross borrowing
requirement
(2014F, % of GDP)
Govt. Foreign
Currency Debt/
CPI Inflation
(2014F, % y.o)
General govt. debt
(2014F, % of GDP)
Thailand
(Baa1 stable)
-0.6% 45.7% 8.2% 1.9% 2.9% 32.8%

External vulnerabilities/exposures: Thailand (Baa1 stable) has relatively low external vulnerability,
with a very small current account deficit, low EVI, favourable government debt structure, and
substantial policy space if required to respond to the deleterious effects of a potential emerging market
crisis. Not surprisingly, the Thai baht has appreciated 1.6% against the US dollar so far this year in
contrast to other emerging market currencies that have come under pressure.
Nevertheless, the ongoing political crisis is having a negative effect on key sovereign credit metrics,
slowly undermining some of the sovereigns traditional buffers.
6
Disruptions associated with anti-
government protests which remain largely confined to certain areas in Bangkok but have been
dragging on for about five months are affecting investor sentiment. The currency depreciated more
than 10% over the course of 2013. FX reserves declined to US$ 158 billion as of early January to their
lowest level since Sep 2010, but have stabilized since then. Meanwhile, growth will be negatively
affected in 2014, primarily because planned public investment will be further delayed with some
negative spill-over into private investment. Amid the impact on confidence, we expect domestic
demand will remain weak for at least the first half of 2014.
EXHIBIT 1
Foreign Exchange Reserves Declining Amid Ongoing Political Turmoil

Source: Bank of Thailand, Moodys Investors Service.

Mitigants/credit supports: Despite the political disruptions, most of Thailands key credit strengths
remain intact.
7
Current account deficits remain small and the external vulnerability indicator is below
50%. The sovereign boasts a favourable government debt structure with long-dated maturities
(Thailand is among the few countries with a 50-year government bond) and very low levels of foreign
currency-denominated debt. Meanwhile, policymakers have considerable policy space: general

6
See Thailands Constitutional Court Nullifies General Election, Fuelling Political Uncertainty; a Credit Negative, 24 March 2014
7
See Thailand: Credit Fundamentals Strong Enough To Withstand Political Crisis, 5 March 2014
26
27
28
29
30
31
32
33
34
150
155
160
165
170
175
T
H
B
/
U
S
D
U
S
$

b
i
l
l
i
o
n
FX reserves (left) Exchange rate (right)

43 MARCH 25, 2014


government debt is a relatively small 33% of GDP while wider public sector debt represents less than
10% of GDP with low contingent liabilities; financing costs remain low, with 10-year government
bond yields below 4% - below their long-term average of 4.3% since 2001; and inflation expectations
are well-anchored thanks to a credible monetary policy framework.
For further information: Credit Opinion: Thailand, Government of
Steffen Dyck
Assistant Vice President Analyst
+65.6398.8324
steffen.dyck@moodys.com

44 MARCH 25, 2014


Turkey: Political Turbulence and Market Volatility Heightens Turkeys External
Vulnerability

Current account
balance
(2014F, % of GDP)
indicator* (2014F)
Gross borrowing
requirement
(2014F, % of GDP)
Govt. Foreign
Currency Debt/
CPI Inflation
(2014F, % y.o)
General govt. debt
(2014F, % of GDP)
Turkey
(Baa3 stable)
-6.2% 171.3%* 10.5% 30.0% 8.2% 35.2%
** Includes trade credits. EVI excluding trade credits = 145%, which would change the shading to moderate vulnerability.

External vulnerabilities/exposures: The Turkish economys large external imbalances render it
vulnerable to a decline in foreign capital inflows. Turkey (Baa3 stable) recorded a current account
deficit estimated at 8.1% of GDP in 2013. In the past 12 months, , the Turkish lira depreciated 21%
vis--vis the US dollar due to weakened domestic and external investor confidence. The effects of
market volatility associated with QE tapering have been amplified by domestic political turbulence,
heightening Turkeys external vulnerability.
On 28 January, the Central Bank of Turkey (CBRT) significantly raised interest rates across the board
to prevent rising inflation pressures as a result of the sharply depreciating lira, shore up investor
confidence, and alleviate pressure on the sovereigns foreign-exchange reserves, which are equivalent to
15% of GDP. While the CBRTs action has helped to contain currency volatility and reduce financial
stress in the economy, it comes at the cost of significantly weakening Turkeys economic growth
prospects for 2014.
8

Moreover, the maturity structure of the countrys external debt, a third of which is short-term, and
dependence on the mostly short-term nature of capital inflows could potentially heighten the risk of a
hard landing. Foreign-currency refinancing risks are also reflected in a moderately high external
vulnerability indicator (EVI), which at nearly 165% of foreign exchange reserves in 2013 and rising
this year compares less favorably than the Baa peer average.
EXHIBIT 1
Turkeys Public Finances Compare Favourably With Peers
General Government Debt as a % of GDP General Government Interest Payments as a % of Revenues

Source: Turkish Treasury, Moodys

8
See Turkey: Central Banks Monetary Tightening Will Alleviate Foreign-Exchange Pressures, But Downside Risks Persist, 30 January 2014
0
10
20
30
40
50
60
70
80
2008 2013E
0
5
10
15
20
25
30
2008 2013E

45 MARCH 25, 2014


Mitigants/credit supports: The governments own balance sheet remains a credit support, and fiscal
policy is expected to able to absorb some of the shocks to the economy. Overall general government
debt is relatively low at 35% of GDP and compares favourably with peers (see Exhibit). While foreign
currency-denominated debt accounted for around 29% of the governments total debt stock in
October 2013, the absolute amount of foreign-currency debt is relatively low at 13% of GDP. In
addition, the sensitivity of the governments debt to possible changes in interest rates is being reduced
via ongoing efforts to lengthen its domestic and external debt profile to average maturities of 3.9 and
9.3 years, respectively, as of end 2013.
9
Nevertheless, an escalation of political tensions that would
affect the economy beyond what our central scenario anticipates would exert downward pressure on
the rating.
10

For further information: Credit Opinion: Turkey, Government of
Alpona Banerji
+44.20.7772.1063
alpona.banerji@moodys.com

9
See QE Tapering & Turkey: Impact on Various Sectors of Turkish Economy Will Likely be Limited and Short-Lived Given Existing Buffers, 2 December 2013
10
See Turkey: Answers to Frequently Asked Questions About Credit Impact of Currency Weakness, 31 January 2014

46 MARCH 25, 2014


Ukraine: Fragile External Liquidity Situation Due To Large Current Account Deficit,
Unstable Access to Finance and Political Uncertainty

Current account
balance
(2014F, % of GDP)
indicator* (2014F)
Gross borrowing
requirement
(2014F, % of GDP) **
Govt. Foreign
Currency Debt/
CPI Inflation
(2014F, % y.o)
General govt. debt
(2014F, % of GDP)
Ukraine
(Caa2 negative)
-6.8% 300.4% 12% 51.1% 2.3% 47.6%
** Given the weak financial position of the national gas company Naftogaz, we think that it is likely that the sovereign will have to cover its debt liabilities in addition to its operating deficit.
Adding the debt service (principal and interest) for Naftogazs Eurobond of around $1.9 billion will result in $22.3 billion in gross financing requirements, i.e. 13.4% of 2014 GDP.

External vulnerabilities/exposures: Ukraines (Caa2 negative) very high external vulnerability is driven
by a wide current account deficit, very limited and dwindling FX reserves, the stalling of the Russian
bail-out programme, and the lingering threat of a run on retail deposits. In 2013, the current account
deficit reached 8.9% of GDP. Foreign direct investment (FDI) has not covered the current account
deficit since 2011; from January to October 2013, net FDI only covered around 20% of the current-
account deficit. FX reserves amounted to $16.1 billion as of end of January 2014, a 30% decline from
Jan 2013 and corresponding to only around 2 months of goods and services imports. Coupled with
large foreign-debt repayments in 2014, this produces an external vulnerability indicator (EVI) in excess
of 300%. Moreover, unstable access to financing, the high share of foreign-currency denominated
debt, a significant increase in debt to GDP in recent years, and the current fragile political situation
could worsen Ukraines already precarious external liquidity situation.
Most recently, the central bank for the first time since 2009 has allowed the official exchange rate to
move away from close to 8.0 per US dollar reaching 9.75 on 18 March, against the background of a
significant decline in FX reserves in January due to interventions by the central bank and because the
hryvnia has come under significant pressure on the interbank market since the start of the year,
reaching its lowest point since 2009. Downward pressure on the currency (which, due to the 50%
share of foreign currency-denominated debt, significantly increases debt repayments in case of a
depreciation) and external liquidity pressures are very acute in light of high upcoming external debt
repayments, external liquidity support from Russia stalled, and still an uncertain outlook for an IMF
assistance program. Moreover, all solutions for alleviating Ukraines external liquidity situation with
external support carry significant implementation risks.
11
We downgraded the sovereign rating to Caa2
with a negative outlook in January.
12

11
See Ukraines External Support Options Are Hard to Implement, 27 February 2014
12
See Moody's downgrades Ukraine's sovereign rating to Caa2; assigns negative outlook, 31 January 2014

47 MARCH 25, 2014


EXHIBIT 1
Previously Low, But Rising Govt. Debt Levels
Gen. Gov. Debt/GDP

EXHIBIT 2
Gradually Eroding Favourable Debt
Affordability
Gen. Gov. Interest Payment/Gen. Gov. Revenue

Sources: Haver Analytics, IMF WEO, Moody's

Mitigants/credit supports: A key credit support has been Ukraines high debt affordability, as reflected
by low debt interest payments as a percentage of government revenues, a solvency indicator. Although
rising in recent years, at just over 6% of government revenues Ukraines debt interest payments remain
well below the median of similarly rated sovereigns.
For further information: Credit Opinion: Ukraine, Government of
Thorsten Nestmann
+49.69.70730.943
thorsten.nestmann@moodys.com
0
10
20
30
40
50
60
70
80
90
Ukraine
B' Category Median
'Caa' Category Median
0
2
4
6
8
10
12
14
16
18
Ukraine
'B' Category Median
'Caa' Category Median

48 MARCH 25, 2014


Venezuela: Precarious Foreign Exchange Reserve Levels, Dependence on Oil
Exacerbate External Vulnerabilities

Current account
balance
(2014F, % of GDP)
indicator* (2014F)
Gross borrowing
requirement
(2014F, % of GDP)
Govt. Foreign
Currency Debt/
CPI Inflation
(2014F, % y.o)
General govt. debt
(2014F, % of GDP)
Venezuela
(Caa1 negative)
+3.4% 610.5% 5.4% 51.1% 35.0% 34.1%**
** Central government debt only.
External vulnerabilities/exposures: Venezuelas (Caa1 negative) vulnerability to external shocks is
increasing as the current account surplus continues to shrink while the capital account remains in
deficit. Foreign currency reserves have declined to a precarious $2.3 billion at the end of Q3 2013
from $5.9 billion at the end of 2012. (The central bank holds more than $16 billion in gold reserves,
somewhat offsetting the very high External Vulnerability indicator in excess of 600%. However, the
value of these reserves has declined nearly 25% last year as the price of gold dropped.)
Foreign exchange controls intended to preserve foreign currency have instead generated increasing
macroeconomic imbalances and distortions, including a plummeting parallel exchange rate, an
overvalued Bolivar and a scarcity of dollars. Capital flight has been exacerbated by government
intervention in the economy, including price controls and widespread nationalizations, that have
weakened investors confidence. The parallel exchange rate has risen from 17 to more than 80
bolivares to the dollarnearly 14 times the official ratein the past 14 months and inflation rose
from 20.1% to 56.2% in the same time frame, while Venezuelas sovereign yields have spiked to more
than 17% from less than 10% in mid-May 2013, which suggests the countrys ability to access markets
has been severely curtailed.
EXHIBIT 1
Current Account Surplus Has Narrowed
Current account balance, % of GDP

Source: BCV , Moodys
EXHIBIT 2
Foreign Exchange Reserves Have Declined to
Perilous Levels
Official Foreign Exchange Reserves (US$ Billions)

Source: BCV , Moodys

The economys dependence on oil as a source of export revenues and persistent large budget deficits
make the economy very vulnerable to volatility in global prices and demand. Oil now accounts for
approximately 95% of merchandise exports because unsustainable government policies have led to a
collapse in private sector exports. Meanwhile, still-sizeable financial assets supporting the
governments capacity to pay debt in the near-term continue to decline steadily.
0
5
10
15
20
2
0
0
5
2
0
0
6
2
0
0
7
2
0
0
8
2
0
0
9
2
0
1
0
2
0
1
1
2
0
1
2
2
0
1
3
F
2
0
1
4
F
0
5
10
15
20
25
30
35
2
0
0
5
2
0
0
6
2
0
0
7
2
0
0
8
2
0
0
9
2
0
1
0
2
0
1
1
2
0
1
2
2
0
1
3
F

49 MARCH 25, 2014


Mitigants/credit supports: A current account surplus (forecast at 2.5% of GDP this year) provides
some mitigation to external shock exposure. State-owned oil company PDVSA (rating outlook)
controls some of the worlds largest oil reserves and will continue to generate an ample supply of hard
currency earnings as long as oil prices remain relatively high. Central government debt levels remain
moderate relative to GDP (around 35% of GDP), a well termed-out debt structure limits rollover risk
and dollar-denominated revenues from PDVSA provide a natural hedge against exchange rate risk.
For further information: Credit Opinion: Venezuela, Government of
Aaron Freedman
+1.212.553.4426
aaron.freedman@moodys.com
Jaime Reusche
+1.212.553.0358

50 MARCH 25, 2014


Report Number: 165831
Author
Matt Robinson
Research Writer
Shanthy Nambiar
Production Associates
Masaki Shiomi
Vinod Muniappan

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