11 May 2022
Inflationary pressure, continued COVID lockdowns in China, and uncertainty due to the ongoing war in Ukraine all drove sentiment across financial markets; this backdrop was especially challenging for EM fixed income markets. The yield on US Treasuries saw another sharp rise and the dollar strengthened.
Inflation and growth rates rose for much of the region. In Egypt, Suez Canal revenues rose to a record high, and the IMF outlined key areas for reform. In Zambia, China agreed to co-chair an official creditor committee, the formation of which has held up the country’s IMF program and debt restructuring.
Countries that continue to remove COVID restrictions saw increases in domestic consumption and inflation. In contrast, ongoing lockdowns in China and lower domestic growth expectations are weighing on the region. The People’s Bank of China remains accommodative, cutting the reserve requirement ratio.
We began to see some social discontent across certain markets, including Peru, Chile, Argentina and Brazil. There were tentative signs that inflation in Brazil is approaching its peak. In a positive sign for future policy direction in Mexico, congress voted against the president’s electricity reform bill.
Central and Eastern Europe
Inflation remains high across the region, with central banks raising rates to try to tame it, although Poland’s central bank was an outlier with a smaller-than-expected hike. Household consumption in Hungary remains quite robust, but in the Czech Republic, forward-looking indicators point to a slowdown.
Rest of Europe, Middle East and Africa (EMEA)
The war in Ukraine became more localised in the east of the country, but wider regional implications were felt when Russia cut its gas exports to Poland and tensions rose in Moldova. In Turkey, the lira remained relatively stable, at the cost of the continued intervention from the central bank.
EM corporate debt highlights
Despite a highly volatile global backdrop, credit spreads were broadly flat over the month, both in investment grade and high yield markets, but the sharp underlying move in US rates drove negative total returns.
Emerging market: These markets carry a higher risk of financial loss than more developed markets as they may have less developed legal, political, economic or other systems.
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