Fitch Ratings said that emerging market sovereigns are, by and large, well placed to ride out the disruption in global credit markets in the near-term without any impairment to sovereign credit quality, thanks to healthy buffers of external liquidity. This is the conclusion of a Sovereigns Special Report released by Fitch.

The ongoing turmoil in global credit and money markets has spilled over to emerging markets. Emerging market ("EM") sovereign bond spreads have widened, currencies have weakened, equity markets have fallen and some domestic bond markets have seen declines. While EM asset prices have been affected less dramatically than some other asset classes, the sharp decline in credit availability is widespread. However, Fitch has not responded with any negative credit rating actions for EM sovereigns in response to the situation. Though EM asset prices have fallen sharply, Fitch judges that EM sovereign credit fundamentals are sufficiently robust to withstand the current volatility in global financial markets.

With the switch to local capital markets for fiscal funding and healthier sovereign external balance sheets, Fitch estimates that EM sovereigns only need to raise a further USD7bn from international capital markets over the remainder of 2007. This additional borrowing will be from Emerging Europe, including Turkey, where external liquidity pressures are more significant than elsewhere.

Private sector (including quasi-sovereign) external debt maturing over the next 17 months is estimated to total USD380bn (compared to just USD43bn for sovereigns), much of which has been borrowed by entities with ratings lower than their sovereign.

With international reserve assets exceeding USD3.2trn (USD2.1trn excluding China), EM central banks are well-placed to supply foreign currency in the event that EM private sector borrowers face a sustained lock-out from international capital markets.

Record flows of capital into emerging market economies in recent years - gross financial market flows to EM exceeded USD480bn in 2006 - suggest potential for substantial outflows of capital that would pressure local financial markets and currencies if the 'flight to safety' were to intensify.

In the current environment, there is even greater onus on policymakers in emerging markets to ensure they respond in a timely and appropriate manner as events unfold. While exchange rate flexibility and reserve cover may have given policy makers more latitude than in previous crisis periods, greater foreign participation in local asset markets has raised the premium on effective monetary policy management.