Fears over “original sin” are once again stalking emerging markets (EM). As the US dollar surges against most EM currencies, a multi-year EM binge on US dollar debt is morphing into an inevitable hangover.
As the chart below shows, the international borrowings of many developing countries have vaulted higher since the 2008 financial crisis. A significant portion of these debts are in US dollars, setting up scenarios for “original sin” – in which the dollar debt servicing requirements far exceed borrowers’ direct ability to generate dollar revenues. Read more
By Paul McNamara, GAM
Events in recent months have given rise to some of the best opportunities in emerging market (EM) currencies that we have seen for some time. Following the sharp fall in commodity prices in the fourth quarter of 2014, the currencies of a number of commodity producers struggled.
These developments appear to have triggered a broader sell-off in EM currencies, with those that should benefit from lower commodity prices, such as the Indian rupee, Turkish lira, Mexican peso and Polish zloty, weakening as well. We believe these moves provide the key opportunities for 2015. Read more
Clouds hang over Russia and challenges abound in Latin America and South Africa, but emerging market (EM) consumers remain robust in Asia and are voracious almost everywhere when it comes to buying cars, smartphones and holidays, a survey of 16,000 EM consumers conducted by Nielsen, a research firm, shows.
The survey – conducted in Brazil, China, India, Indonesia, Mexico, Russia, Saudi Arabia, Turkey and South Africa for Credit Suisse – shows that differentiation between countries and products is key to understanding EM consumer trends this year, rather than generalising across emerging markets as a whole. Read more
Russia’s economy is heading for a deep recession this year. Brazil is stagnating and China’s dynamism is dissipating, helping to depress the prices of commodities that many developing countries produce. But in spite of such afflictions, analysts caution against thinking that a multi-year consumer bonanza in emerging markets (EM) is running out of steam.
The “biggest growth opportunity in the history of capitalism”, as McKinsey called EM consumer spending in a 2012 report, may suffer setbacks in some key markets this year, but overall the narrative is set to flourish as disinflation triggers interest rate cuts and low oil prices put more money into EM consumers’ pockets, analysts said. Read more
Emerging Asia is set to be the world’s fastest-growing region again in 2015, skirting the contagion from Russia’s crisis and riding the fall-out from weak commodity prices, according to Fitch, the credit rating agency. Nevertheless, structural frailties stalk seven out of 10 countries in the region, with surging debt levels a particular concern, the agency said.
The region, excluding China, is expected to expand by 5.9 per cent in 2015 and 6.1 per cent in 2016 – compared to an average for global emerging markets of 4.1 per cent and 4.5 per cent respectively, Fitch said in a report. These forecasts compare with the International Monetary Fund’s (IMF) estimates that developing economies would this year grow at 4.3 per cent, accelerating to 4.7 per cent in 2016. Read more
By Professor Avinash Persaud, Peterson Institute for International Economics
Debt is political. There is perhaps no better illustration of this than the observation that during the darkest hour of the budget stand-off between the US House of Representatives and the White House in January 2013, the yield on 10 Year US Government Bonds barely lifted above 2.0 per cent.
Adjusted for expected inflation and the real yield was 0 per cent, close to the implied default risk. In Washington, the US was teetering on the edge of a fiscal cliff. On Wall Street, it was boasting record low risk premia. Those in search of analysis as unfiltered from political spin as possible will welcome the new FT-IMF on-line tool that allows users to plug in various scenarios and see the likely evolution of debt levels. Naturally, some caution is required. Read more
By Jonathan Fenby, Trusted Sources
As reform has become the principal touchstone for emerging markets (EM), the importance of the political and personal agendas of the leaders in each of the seven countries primarily concerned has emerged as a major factor. This applies as much on the positive side – India, China, Indonesia and Mexico – as on the negative slate – Turkey and South Africa. For its part, Brazil is on a knife edge in policy terms.
We would score them as follows on a scale of +2 to -2 taking into account what they have achieved, what they have committed themselves to and the impact of political, economic and social factors on prospects for structural change needed to achieve sustainable growth. Read more
By Jorge Mariscal of UBS Wealth Management
Over the past 20 years, 700m people have been lifted out of poverty in developing economies. This new middle class should grow another 60 per cent by 2020, increasing total consumption from $8tn to $13.5tn a year.
As the income gap with developed world peers narrows and aspirational consumer values converge, the emerging market middle class will be able and willing to pay for better education, health, housing, and infrastructure. These ‘public’ industries represent the most dynamic areas of the developing world – the new emerging markets to watch in 2015 and beyond.
Mass transit in Asia is an excellent example. The number of Asians living in megacities with more than 10m residents will double by 2025, the UN predicts. Meanwhile, vehicle ownership is doubling every five years amid rising incomes, while sharply rising carbon emissions are reducing air quality. Read more
By Jan Dehn, Ashmore Group
As the Fed prepares to hike rates in 2015, the window of opportunity presented by hyper-easy monetary policies for developed economies to undertake deeper fundamental reforms is rapidly closing.
So far, hardly any progress has been made. President Obama’s tenure has not seen the country’s economic problems solved. US trend growth has halved since the 1960s, while the debt stock has doubled to more than 350 per cent of GDP (not counting the further 300 per cent of GDP in unfunded social care liabilities). Europe and Japan recently re-engaged in QE-type stimuli to defend their fundamentally challenged economies from the effects of higher US rates in the future. Read more
“If you see ten troubles coming down the road, you can be sure that nine will run into the ditch before they reach you.”
For about two weeks in late October, it seemed as if these optimistic words from Calvin Coolidge, the former US president, might have encapsulated the mindset of emerging market (EM) investors.
But the late October rally in EM financial assets has now stalled. Investors are relinquishing hopes that market troubles may turn out to be mere phantoms and focusing again on the very real problems coming their way. Four of the most intractable are set out below. Read more
The slowing Chinese economy and unwinding of US quantitative easing have squeezed emerging market bonds. However, Brett Diment at Aberdeen Asset Management sees an opportunity in local currency EM debt, as he explains to FT’s EM editor James Kynge.
By Michael Power, Investec Asset Management
“Are we nearly there yet?” Most of us have faced – and in our younger days probably asked – the same question. As with children on long car journeys, this question is also posed by investors who cannot wait for bear markets to be over.
Commodity investors – and recently this has expanded from the metals and coal complexes to include oils – are wondering aloud when their recent ordeal will all be over. The same can be said for investors in those commodity-rich countries, as they survey their currency-ravaged portfolios. And this phenomenon is not confined to emerging markets (EM) – investments in Australia, Canada and even Norway have suffered the same fate. Read more
By Ian Dixon of Investec
Following his government’s first budget there has been much debate about the amount of change Narendra Modi, India’s new prime minister, will be able or willing to achieve. His supporters counter such scepticism by arguing that the government is just three months old and to expect radical change in such a short time after 10 years in opposition was always unrealistic.
On international debt markets, however, we have already begun to see a step change in attitudes towards Indian debt, particularly among UK investors. Read more
Hyun Song Shin, head of research at the Bank for International Settlements, has been sounding alarm bells over the debt issued by emerging market corporates since last year. His latest research, presented to the BIS AGM last month, explains how investors’ hunger for yield has put them on a hair trigger for selling should anything go wrong.
Shin’s paper shows how many more long-duration EM bonds asset managers are holding than they were in 2008. Read more
The rush of emerging markets into euro-denominated debt continued on Friday, with Morocco issuing a €1bn 10-year bond with a 3.5 per cent coupon, priced to yield 215 basis points above midswaps, the benchmark euro bond rate.
Mohamed Boussaïd, Morocco’s finance and economy minister (pictured), told beyondbrics that while market conditions had been favourable, the deal was above all an endorsement of Morocco’s economic and political reforms and of its success in steadily reducing the government’s budget deficit. Read more
Is it 1997 all over again? EM bulls scoff at the idea: this time, they say, is different, and for solid reasons.
Two things especially have changed, according to this view. Emerging markets no longer have such high levels of debt relative to GDP.
And whereas in the 90s many EMs had a lot of dollar-denominated debt backed by local-currency revenues (the so-called “original sin”), much of this has been replaced by local-currency debt.
But have things really changed that much? Read more
Global bond sales from emerging markets have defied all odds to hit a record high in 2013.
Despite the market turmoil caused this summer by concerns over the US Federal Reserve’s plans to scale back its monetary stimulus programme, EM bond issuance jumped to $506bn last year, surpassing the record $488bn in 2012, according to data from Dealogic. Read more
Few expected September to be a record month for sovereign debt auctions. Ever since the US Federal Reserve first hinted in May at a possible “tapering” of its massive bond buying programme, emerging market countries have found borrowing much tougher and more expensive. Borrowing costs soared and issuance shrunk accordingly.
But then Fed decided to keep the printing presses whirring and EM yields settled down a bit. Not surprisingly countries took the opportunity to issue debt. The result? September ended up being the best month for EM sovereign debt issuance this year. Read more
The party is back – thanks to Ben.
Over the past two days, borrowers from Colombia to Sri Lanka have rushed to take advantage of the window of opportunity created by the US Federal Reserve’s decision to keep the QE punchbowl flowing, raising at least $5.3bn on the international bond markets. Read more
What's the yield on that?
What’s the going rate for a Kardashian? A yield of 6.25 per cent, according to Armenia’s bond issue.
The “Kardashian”, as it has been dubbed by Standard Bank’s head of emerging markets research Timothy Ash, will be issued in Armenia’s first international sovereign debt sale. Named after Kim Kardashian, a US celebrity whose family (see left) is originally from the country, the dollar bond is the latest exotic asset to have attracted investors’ gaze. Read more