Debt risks come back to the fore

Problems at Evergrande in China have dominated the headlines recently, but (sovereign) debt risks are brewing in other EMs too. Concerns about higher government spending and rising public debt levels are building in parts of Latin America. Meanwhile, sovereign dollar bond spreads have surged in a handful of frontier markets including Sri Lanka, Tunisia and Ethiopia. These economies all face the worrying combination of large external foreign-currency debt burdens, low FX reserves and weakening currencies. We are most worried about Sri Lanka. While the country will probably muddle through this year, it will face a crunch point in early 2022 when large bond repayments are due. A default is now looking the most likely option.
William Jackson Chief Emerging Markets Economist
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Supply shortages take their toll

The supply shortages that have affected many DMs have also intensified in emerging economies over the past couple of months. The automotive sector has been hit hard by global semiconductor shortages, weighing on recoveries in Mexico, Czechia and Hungary in particular. More broadly, EM manufacturers are struggling to meet new orders, causing backlog of works to increase. Meanwhile, recent power shortages have weighed on recoveries in China, India and Brazil. As shortages continue, they are likely to not just weigh on growth, but also add to upward pressure to core inflation. That will probably keep central banks in Latin America and Central Europe in particular in tightening mode.

18 October 2021

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Car woes to weigh on recoveries in Mexico & CEE

The supply constraints that have hit global vehicle output have probably reduced the level of GDP by a modest 0.1-0.2% in most EM auto producers, but some countries like Czechia, Hungary and Mexico have suffered much bigger blows. And the drag from vehicle production is likely to persist for some time yet.

15 October 2021

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Emerging Markets Capital Flows Monitor

Net capital inflows into EMs appear to have dropped over the past few weeks as investors have turned more risk averse. Looking ahead, a further rise in US Treasury yields could lead to larger outflows from EMs over the coming months. The good news is that vulnerabilities to outflows in most major EMs look limited, but Turkey is a key exception.

13 October 2021

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Argentina’s PASO surprise, Pemex debt

The loss for Argentina’s ruling Peronists in the open primary (PASO) for mid-term legislative elections in November suggest that the political tides might be shifting and boosted local financial markets. But the country’s public debt problems are likely to re-surface before too long. Meanwhile, the news that Mexico’s government has purchased $7bn of foreign exchange from the central bank appears to be another step towards the state taking greater responsibility for Pemex’s debt problems.

17 September 2021

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Brazil’s political crisis, Mexico’s austere budget

It’s been a rollercoaster week in Brazilian politics and financial markets and, while investors have breathed a small sigh of relief in the past day or so, we think that they will be put under further pressure as the 2022 election nears. Elsewhere, Mexico's austere 2022 budget unveiled this week suggests that fiscal policy will continue to do very little to support the economy, which reinforces our view that Mexico's recovery will underperform most of its regional peers.
CE Spotlight 2021: The Rebirth Of Inflation? We’re holding a week of online events from 27th September to accompany our special research series. Event details and registration here.

10 September 2021

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The pandemic and EM scarring risks

The pandemic is likely to inflict lasting damage on potential growth in economies in much of Latin America, Africa and South and Southeast Asia, adding to the structural headwinds that they already faced. However, the risk of permanent scarring in many other emerging markets – including much of East Asia and Emerging Europe – is overstated.

9 September 2021
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