Emerging market (EM) sovereigns will suffer long-lasting revenue losses due to the coronavirus crisis, with governments’ ability to implement and enforce effective revenue-raising measures set to be a key credit driver over the coming years, Moody’s Investors Service said in a report today.
- EM governments’ ability to implement and enforce effective revenue-raising measures will be an important credit driver over the next few years
- Subdued global recovery will shift focus to broadening tax bases, which will be challenging
Almost all EMs will record budget deficits this year and face constraints in cutting spending amid the pandemic, amplifying the importance of revenue generation.
EM fiscal revenue will stay below pre-crisis levels amid a slow and halting global recovery. On average, EM governments will lose revenue worth 2.1 percentage points of GDP in 2020, above the 1.0 pp loss in Advanced Economies (AEs).
“The coronavirus crisis has underlined the importance of revenue generation for emerging market governments,” said Lucie Villa, a Moody’s Vice President – Senior Credit Officer and the report’s author.
With the support of development finance institutions, EM governments will look to implement or resume tax-raising measures. However, only a few governments have successfully raised revenue much faster than GDP growth over the last 10 years.
Sovereigns with a preexisting and established focus on raising taxes from low levels like Costa Rica, or past episodes of effective tax policy changes like Georgia and Montenegro, will likely fare better. Sovereigns already struggling to increase their tax intake before the pandemic, like Tanzania and Ethiopia, Sri Lanka, Pakistan and Bangladesh will face additional hurdles.
Subscribers can access the report here
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