Global backdrop lays bare EM vulnerabilities

Most large EMs are weathering the environment of rising global interest rates and a strong dollar relatively well. That said, countries with large current account deficits, most notably Chile and Hungary, are finding their currencies in the crosshairs, prompting hawkish monetary policy responses. Central banks in Asia are turning increasingly hawkish too, with policymakers in the Philippines hiking interest rates at an unscheduled meeting last week. Meanwhile, tighter external financing conditions combined with the effects of the pandemic and the war in Ukraine have pushed Sri Lanka into default. Sovereign dollar bond spreads have widened sharply in other frontier markets too and a growing number of EMs now have debt in distressed territory.