- A sharper than expected reduction in qualitative easing from developed market central banks could result in a repricing of emerging market credit risk.
- Each country has different vulnerability; Turkey faces refinancing risk while Latin American elections could prove a flashpoint.
- A ratcheting up of protectionism by the US is the key geopolitical risk for emerging markets.
Developed market central bank policy has resulted in a sharp depression in yields, so investors have had to seek higher returns elsewhere. Emerging markets have been a major beneficiary of these flows.
But what happens if there is a sharper than expected reduction in qualitative easing from developed market central banks? In our video, our experts explain that credit risk repricing is a potential threat to global emerging markets and outline how the risks differ for each emerging market country.
For Turkey, we believe external financing may become an issue – largely because of geopolitical tensions between Turkey and the EU and the US.
Meanwhile, critical elections are pending in Colombia, Mexico and Brazil. There is the possibility of victory by the left in each country, which could undermine their fiscal stability.
There are also important elections coming up in Southeast Asia where reform-minded leaders are seeking second terms. There is a possibility of further opening up of domestic economies to foreign investors and increased infrastructure spending.
While the outcome of these elections will no doubt impact EM markets, the key geopolitical risk for all global emerging markets is US trade policy. If protectionism becomes a reality rather than just rhetoric, it will affect many countries – and particularly Asia. Political changes in the US are also prompting some people to lose faith in institutions while there are still concerns about the EU’s ability to deliver prosperity.
In contrast, many global emerging markets remain optimistic about their future prospects. The IMF projects EM’s contribution to global GDP growth will rise from 66% in 2017 to 78% by 2022, providing a supportive backdrop for capital inflows. China’s plans reflect this confidence most vividly; it has embarked on a series of road, rail and maritime infrastructure projects to enhance its connections with Asia, Africa, EMEA and even the Americas that could transform trade and development.
Renuka Fernandez, Senior Rates Strategist, EMEA
Inan Demir, Senior Emerging Markets Economist
Benito Berber, Senior Latin America Economist
Euben Paracuelles, Senior ASEAN Economist
Annisa Lee, Head of Asia ex-Japan Flow Credit Analysis
Bilal Hafeez, Head of EMEA Fixed income Research & Global Head of G10 FX & Rates Strategy
Sergei Voloboev, Sovereign Credit Strategist, CEEMEA