Just as developing economies were poised to profit from the post-Covid-19 rebound in global growth, a fire in the bond market ravaged the bond markets only to burn them down again.
Most major investment banks predicted a bumper year 2021 for emerging market (EM) assets as long as a critical issue – global borrowing costs rising too rapidly – was avoided. Well guess what, they’re on a tear.
February saw their biggest monthly gain since Donald Trump’s surprise victory in the 2016 US presidential election and, although the move came from record levels, for emerging markets which now carry nearly $ 80 trillion in debt. dollars, the last few weeks have been painful.
The widely followed JPMorgan Emerging Market Bond Index (EMBI) is having its worst start to the year in a quarter of a century, currencies have retreated and the MSCI Emerging Equity Index has just suffered its largest weekly decline since peaking. Covid-19 panic last March.
The carnage was described as a bond bonfire by ING analysts and prompted some of those bullish investment banks like JPMorgan and Morgan Stanley to cut their bets.
Rising developed market bond yields are bothering emerging markets in two main ways.
First, they drive up borrowing costs. BofA estimates that emerging markets will sell more than three-quarters of a trillion dollars in debt this year – $ 210 billion by governments and over $ 550 billion by corporations.
Higher rates mean an increase in public debt ratios which soared 15.5 percentage points in the 60 major emerging markets last year and left 13 of those countries with debt-to-GDP ratios above 100%.
Second, it reduces the premium that existing emerging debt offers investors over ultra-safe and liquid US Treasuries.
If the risk-reward calculation no longer matches, fund managers can sell quickly, as seen in the 2013 “tantrum” when the Federal Reserve hints at ending its easy money policies. sparked a sale of emerging assets estimated at $ 25 billion in just two months. .
The effects of this episode were particularly severe in the “fragile five” – Brazil, India, Indonesia, South Africa and Turkey, which had accumulated large current account deficits financed by capital inflows to. short term.
This time, investors are worried about at least some of them.
“Brazil and South Africa are countries where the combination of persistently low growth, rising public debt, very steep yield curves with very high long-term real interest rates has become of great concern, “said David Lubin, CEO of Citi and head of emerging markets economics.
“Mexico could also be on this list. “
Yet alarm bells don’t ring so loud now.
For some reason, inflation-adjusted US “real” yields remain low by historical standards at around 80 basis points, keeping emerging market assets attractive.
We could be at the door of a big, big economic boom
Barings’ sovereign debt and currencies group Ricardo Adrogué
By comparison, on the initial taper tantrum, US 10-year “real” yields rose sharply, from -75 basis points at the end of 2012 to 50 basis points positive in mid-2013.
And despite the huge increase in debt, last year’s recessions helped largely eliminate current account deficits, limiting the dependence of many emerging markets on capital inflows and acting as a buffer against rising yields. Americans.
A vigorous recovery in global growth and rapidly rising commodity prices should further help developing economies and even extract some.
Last week, Moody’s raised its pan-EM growth forecast for the year to 7% from 6.1%, due to upward revisions for China, India and Mexico, and to 1.9 trillion dollars in upcoming US stimulus, most institutions are doing the same.
“We could be on the verge of a big, big economic boom,” said Ricardo Adrogué, director of Barings’ sovereign debt and currency group. “Some of those countries that seem hopeless today might actually be OK.”
Others will not be so lucky, however.
Ethiopia is set to become a test for the G20’s new debt relief plan, which stipulates that private creditors’ debt must also be restructured, meaning the government must default.
Others should follow. S&P Global warned last week that Belize was “virtually certain” to default in May. Laos and Sri Lanka have key payments in June and July, while JPMorgan lists 16 countries at risk, from Cameroon to Tajikistan, with a combined debt of $ 61.4 billion.
Tellimer’s senior economist, Patrick Curran, dubbed the new group of vulnerable countries “fragile borders”. It includes Jamaica, Tunisia, Ecuador, Sri Lanka, Belarus, Ethiopia, Laos, Bahrain and Oman.
There have been several already and there is no way to predict how many more there will be.
Adding to the risks, not all emerging markets have yet started rolling out Covid-19 vaccines. In Africa, for example, only a minority of countries are currently immunizing and more variants are emerging.
Countries like Mexico, Jamaica, Panama, Mauritius, Montenegro, Jordan and Fiji – where tourism accounts for nearly 10% of GDP – will wonder if the vaccines will arrive quickly enough to save their busy seasons this year.
“Viral mutations are a real thing that worries me,” said Raza Agha, Head of Emerging Markets Credit Strategy at Legal & General Investment Management.
“There have been several already and there is no way to predict how many more there will be.” – Reuters