Moody's: China's Belt and Road Strategy -- Credit Positive for Emerging Market Sovereigns

Moody's Investors Service says that China's (Aa3 stable) new silk roads -- through which it seeks to deepen economic integration with more than 40 participating countries across three continents -- are credit positive for the emerging market sovereigns involved.

Moody's expects that the Silk Road Economic Belt and 21st Century Maritime Silk Road, which China refers to as its "Belt and Road" strategy, or "One Belt, One Road," will mostly benefit smaller sovereigns with relatively low per-capita incomes, financing constraints on their current account positions, and low investment rates.

Moody's conclusions were contained in its just-released report, "China's Belt and Road Strategy -- Credit Positive for Emerging Markets."

Moody's rates about two-thirds of the sovereigns across the Belt and Road. Of these, more than half are sub-investment grade. Other common threads linking these countries are that they have relatively underdeveloped economies with large infrastructure gaps, and tend to have modest per-capita incomes.

Their natural resource wealth has fueled dynamic growth, and although the recent collapse in commodity prices clouds the economic outlook for these countries, they exhibit fairly strong growth potential.

In this context, the new silk roads could have a transformational impact for smaller, infrastructure-impoverished countries in South and Southeast Asia, by spurring investment and boosting economic growth potential.

Among Moody's rated sovereigns, Bangladesh (Ba3 stable), Cambodia (B2 stable), Pakistan (B3 stable) and Vietnam (B1 stable) are likely to be the biggest beneficiaries of infrastructure investment.

But infrastructure financing could put pressure on the government balance sheets of participating economies.

Moody's also expects bilateral trade flows to receive a boost, particularly in Central Asia, bolstered by infrastructure development. Kazakhstan (Baa2 stable) and Mongolia (B2 negative) are among the rated sovereigns that will benefit from improved trade linkages.

Still, Moody's believes that Belt and Road projects face numerous challenges. Most participating governments face considerable institutional and political challenges and risks in project implementation that could slow execution.

For China itself, the new silk roads have tangible benefits as they will help counteract the country's economic slowdown by jump-starting investment. They will also boost exports and provide the access to commodities necessary for China to sustain strong economic growth.