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  • Emerging Markets Debt Daily

    Always Look on the Bright Side of Life

    Natalia Gurushina, Chief Economist, Emerging Markets Fixed Income Strategy
    September 17, 2021
     

    China’s Evergrande story is still unfolding, but it is important to remember EM strengths (especially on the external side) which create places to hide when things get tougher.

    Problems, risks, and disasters tend to attract a lot of attention – both in the investment community and in the press. China’s Evergrande story is still unfolding – and we saw it weighing on some higher-rated property names. But it is equally important to remember that emerging markets (EM) have a lot of strengths these days - external balances is one of them. We are saying this not to boost our mood before the weekend, but because these strengths create a place to hide when times get tougher. We discuss some of these issues in greater detail in our EM bond monthly commentary.

    First and foremost, the proliferation of orthodox monetary policies in EM paved the way for textbook adjustments of current accounts during the COVID crisis. EMs ended up the last year with an aggregate current account surplus of 1.08% of GDP (vs. 0.25% of GDP in 2019). And this process is still on-going in many places - the consensus currently sees another large surplus this year (0.93% of GDP). Orthodox policies (=allowing currencies to take a hit rather than conducting currency interventions) and the ensuing current account adjustments is the major reason why most EMs managed to preserve and/or boost their international reserves in the past year and a half. This is External Strength #2, and it is directly related to the performance of EM sovereign bonds.

    Finally, EM overseas remittances will probably normalize at some point, but right now they look incredible (see chart below). These are not insignificant numbers – we are talking about something like 8-8.5% of GDP in the Philippines and 3.8% of GDP in Mexico. This is a major supporting factor as regards domestic consumption and growth in the recipient countries, especially against headwinds created by the COVID outbreaks, limited room for additional fiscal support, and potentially more growth moderation in China. Stay tuned!

    Chart at a Glance: Chart at a Glance: EM Overseas Remittances Going Strong

     Chart at a Glance: Chart at a Glance: EM Overseas Remittances Going Strong

    Source: VanEck Research, Moody’s

  • PMI – Purchasing Managers’ Index: economic indicators derived from monthly surveys of private sector companies. A reading above 50 indicates expansion, and a reading below 50 indicates contraction; ISM – Institute for Supply Management PMI: ISM releases an index based on more than 400 purchasing and supply managers surveys; both in the manufacturing and non-manufacturing industries; CPI – Consumer Price Index: an index of the variation in prices paid by typical consumers for retail goods and other items; PPI – Producer Price Index: a family of indexes that measures the average change in selling prices received by domestic producers of goods and services over time; PCE inflation – Personal Consumption Expenditures Price Index: one measure of U.S. inflation, tracking the change in prices of goods and services purchased by consumers throughout the economy; MSCI – Morgan Stanley Capital International: an American provider of equity, fixed income, hedge fund stock market indexes, and equity portfolio analysis tools; VIX – CBOE Volatility Index: an index created by the Chicago Board Options Exchange (CBOE), which shows the market's expectation of 30-day volatility. It is constructed using the implied volatilities on S&P 500 index options.; GBI-EM – JP Morgan’s Government Bond Index – Emerging Markets: comprehensive emerging market debt benchmarks that track local currency bonds issued by Emerging market governments; EMBI – JP Morgan’s Emerging Market Bond Index: JP Morgan's index of dollar-denominated sovereign bonds issued by a selection of emerging market countries; EMBIG - JP Morgan’s Emerging Market Bond Index Global: tracks total returns for traded external debt instruments in emerging markets.

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    Investing in international markets carries risks such as currency fluctuation, regulatory risks, economic and political instability. Emerging markets involve heightened risks related to the same factors as well as increased volatility, lower trading volume, and less liquidity.  Emerging markets can have greater custodial and operational risks, and less developed legal and accounting systems than developed markets.

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  • Authored by

    Natalia Gurushina
    Chief Economist, Emerging Markets Fixed Income Strategy

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