Emerging Market Debt Indicator March 2024

Our EM Debt team provides an update across the investment universe and shares the latest outlook and current top-down positioning.

9 Apr 2024

14 minutes

EMD Team

Chapters

01
Market background
02
Top-down views and outlook
03
Africa
04
Asia
05
Latin America
06
Central and Eastern Europe, Middle East and South Africa
07
EM corporate highlights
01

Market background

Close-up of dark green leaves
Encouraging rhetoric and forecasts by the US Federal Reserve created a constructive backdrop for risk assets, and most EM fixed income indices posted positive returns. Improved risk appetite boosted EM high-yield hard-currency debt markets, but ongoing US dollar strength held back the EM local currency debt market.

It was a good month for risk assets, with positive total returns across most EM fixed income asset classes. At the macro level, figures released in March showed that inflation in the US remained sticky in February and this put upward pressure on US bond yields. However, a dovish-leaning press conference by the US Federal Reserve and its decision to raise its 2024 growth forecasts while maintaining its median ‘dot plot’ forecast of three rate cuts this year brought yields back down, with 10-year US Treasury yields ending the month slightly lower at 4.20%. Elsewhere, the Bank of Japan (BoJ) made its first interest rate hike in 17 years - officially ending its negative interest rate policy – and scrapped its yield-curve controls; both policy changes were largely in line with expectations. However, subsequent weakness in the Japanese yen reflected disappointment in the market that the BoJ was continuing to buy Japanese government bonds at its current pace, with its lack of forward guidance on the interest rate path and emphasis on financial conditions remaining accommodative also weighing on investor sentiment.

In emerging markets, central banks in Latin America became rather more hawkish, notably in Mexico, Brazil and Peru. In China, better-than-expected data releases included stronger exports (and a healthier trade balance), industrial profits and industrial production. However, retail sales were weak and the property sector remained soft, with a further fall in house prices and low sales activity. In India, economic data continued to be very strong, while in Nigeria, the central bank hiked rates by 200 basis points (bps).

Among EM fixed income indices, the local bond index (JP Morgan GBI-EM) was flat over the month. Hard currency markets fared better, with the sovereign bond index (JP Morgan EMBI) rising 2.1%, driven by high-yield issuers. In the corporate debt market, the JP Morgan CEMBI rose 1.0%.

02

Top-down views and outlook

Sea with shore
From a top-down risk perspective, we have retained our overweight target. We kept both our modest overweight targets for EM hard currency debt and EM currencies, and we continue to run an overweight in local debt.

Top-down positioning at the end of March 2024

- - - 0 + ++
Overall risk
Hard currency debt
Local rates
FX

For illustrative purposes only. For further information on the investment process, please see the important information section.

From a top-down risk perspective, we have retained our overweight target. We have kept our modest overweight target for EM hard currency debt. Although we believe we are past the peak in US yields, sticky inflation may keep rates volatility high, so we prefer to focus selectively on bottom-up opportunities among high-yield hard-currency debt issuers. In the EM local currency space, we retained our overweight target exposure. This reflects our ongoing belief that EM rate-cutting cycles have further to go in select markets, which should support rates markets. Within EM local currency debt markets, our positioning bias towards the front-end of the relevant yield curve (shorter-dated bonds) reduces vulnerability to further volatility. We continue to run a modest overweight in EM currencies (EMFX), acknowledging strong underlying country fundamentals, high carry and healthy external balances. This overweight positioning is relative to the Euro, given the ongoing resilience of the US dollar.

Outlook

The global inflation picture continues to be one of moderation overall. Recent data releases have led markets to become more confident of a soft landing (rather than a recession) for economies, especially the US. While financial markets are likely to remain volatile, we continue to be constructive on the medium-term outlook for returns from the EM debt asset class.

Many EM economies have solid fundamental foundations. The more fragile economies are receiving plenty of support from the IMF and other multilaterals. Furthermore, with much of the painful interest-rate hiking now behind them, most EM economies are in an enviable position relative to developed markets overall, with most EM central banks either having completed their hiking cycle or beginning to cut rates. EM bond market valuations look attractive – with some markets still pricing in significantly more risk than we believe is justified.

The market continues to assess when the US Federal Reserve is likely to begin cutting interest rates, with the Fed keeping rates on hold in its March meeting, as expected. But Fed Chair Jerome Powell’s slightly dovish messaging at the FOMC press conference, combined with lower (albeit sticky) inflation and resilient US economic data, mean market participants are increasingly expecting rate cuts from June onwards. However, risks remain that the Fed does not unwind its tight monetary policy as quickly as the market is currently pricing in, which may lead to rate-market volatility.

03

Africa

Africa
Egypt reached a staff-level arrangement with the IMF and saw its credit outlook upgraded to positive by S&P and Moody’s. Debt restructurings in Ghana and Zambia made further progress. Food prices continued to put upward pressure on inflation in some markets, and Nigeria’s central bank continued to tighten its policy.

The main news in Egypt continued to revolve around funding, with the country reaching a staff-level arrangement with the IMF for an US$8 billion programme and the European Union announcing a €7.4 billion package. In addition, both S&P and Moody’s upgraded Egypt’s outlook to positive. Separately, inflation was higher than expected in February at 35.7%, driven by higher food prices.

Interest rates were kept on hold at 29% in Ghana after inflation rose (23% year on year), caused by fuel prices and a weak currency. The country’s trade surplus began to come under pressure from the lower cocoa production. More positively, budget data for 2023 was better than expected, with a 0.4% fiscal surplus achieved versus a 0.5% deficit expected. In other developments, bond holders and the government moved closer to finalising the debt restructuring, which the market hopes will be completed in the second half of 2024. Hard currency bonds in Ghana rallied as a result. 

In Zambia, there was also progress on debt restructuring, helping the country’s hard currency bonds, with the government targeting completion in the next few months.

In Nigeria, the central bank continued to tighten its policy rate by raising rates 200bps towards month end. It also narrowed the rates ‘corridor’ (the band at which the rates market can trade around the central bank rate). At the same time, the central bank has cleared the backlog of foreign exchange. All of this helped the naira to gain over the month. However, real rates remain negative, as inflation is high due to food and transport prices.

In Senegal, the opposition candidate won the presidential election in the first round in a decisive win. There is still significant uncertainty over future policy direction and who will be appointed in senior government roles.

04

Asia

Asia
In China, stronger data on exports, industrial production and fixed-asset investments contrasted with weakness in retail sales and the property sector. India’s economic data remained very robust, and strong semiconductor exports continued to boost South Korea’s trade balance.

China released some better-than-expected data, including stronger exports (and a stronger trade balance), industrial profits, industrial production and fixed-asset investments. However, retail sales were weak, as was credit data. The property sector also remained soft, with a further fall in house prices and low sales activity. The lack of any large fiscal and monetary stimulus amid a lacklustre growth target is also keeping investors cautious. Overall, short-term data has been more supportive of growth; despite this, local bond yields fell over the month due to the market’s concerns over longer-term growth headwinds. Monetary policy rates were left on hold during the month. Turning to the currency market, China’s authorities kept their daily fixings of the currency fairly stable over the month. However, towards month end they allowed the exchange rate with the US dollar to break through the 7.20 level, which has recently been an unofficial limit, to the upper end of the allowed range (c.7.24). The authorities appear determined to keep the fixing stable for now, but pressure on a further weakening remains strong.

Economic data continued to be very strong in India, with the services PMI remaining above 60. Inflation remains elevated at the headline level (5.1% year-on-year), driven by high food prices, which is keeping the Reserve Bank of India cautious and it left rates on hold in March. However, the core measure of inflation continues to be softer. In other data, the February trade deficit was in line with expectations, while the surplus from services is keeping the overall current account well contained.

Strong exports – especially in the semiconductor market – coupled with weak domestic demand continues to support the trade balance in South Korea. Inflation continues to decline, with core in line with expectations at 2.5% year-on-year, allowing the Bank of Korea to remain relatively dovish. South Korea remains on the watchlist to be added to the FTSE World Government Bond Index, and we expect an index inclusion announcement in September.

In Thailand, the central bank made increasingly dovish signals and is reassessing its current monetary policy levels with the view to easing financial conditions, as growth has been disappointing. The budget was also passed for the 2024 financial year, with details of the Digital Wallet Scheme (relating to one-off payments to low-income citizens) set to be announced in April. Our expectation is that the rollout of the scheme will begin in Q4 2024, which is in the next fiscal year in Thailand. Figures for February showed deflation is continuing, at -0.8% year on year.

The Bank of Indonesia left rates on hold and signalled that it does not expect to cut rates before the second half of this year. The trade surplus was lower, at US$0.9 billion vs. US$2.3 billion expected, with exports notably weaker.

The authorities in Malaysia are becoming more concerned around the ringgit’s weakness. The government has been verbally intervening in the currency and encouraged government-linked corporates to repatriate foreign income into ringgit in a bid to support the currency. The trade balance deteriorated somewhat on rising imports and weaker-than-expected exports, but it remains in surplus.

Inflation in Taiwan spiked to 3.1% versus the 2.6% year-on-year expected, reversing last month's downward surprise due to the effect of the Lunar New Year. The central bank then made an unexpected hike (by 12.5bps), although its guidance was dovish overall, noting the hurdle for further hikes is high. The country’s trade balance grew to US$7.9 billion versus US$4.1 billion expected as imports corrected due to lunar new year effects.

05

Latin America

Latin America
Central banks became rather more hawkish in select markets. In Argentina, the fiscal adjustment continued to bear fruit. In Peru, the approval of a sizeable pension fund withdrawal drove up bond yields. While Ecuador continued to move closer to an IMF deal.

Central banks became rather more hawkish over the month in select Latin American markets. Mexico’s central bank, Banxico, cut rate by 25bps, but remained hawkish in its messaging. The Central Bank of Brazil preannounced one more cut of 50bps and suggested it will reduce the pace of cuts after that. Peru’s central bank paused its rate cuts, while higher inflation in Chile has tempered the central bank's dovishness.

In Argentina, the fiscal adjustment continued to bear fruit, with strong fiscal numbers reported for the second month in a row. President Milei also tried to smooth relations with Congress to get his omnibus bill passed, and the government is seeking a larger IMF deal. This all resulted in another strong month for the country’s hard currency bonds. Milei changed the national pension formula by decree, which will increase the fiscal savings, however this might weigh on relations with Congress. Separately, figures for February showed a continued fall in inflation, which was lower than expected.

Inflation was also encouraging in Brazil, with core inflation continuing on its downward trajectory. Economic growth data was also particularly strong, notably retail sales, job creation and economic activity. The central bank continued with its rate cutting cycle, reducing rates by 50bps to 10.75%. However, it changed its guidance statement and opened the door for a reduction in the pace of cuts after one further cut of 50bps. The bank’s inflation forecast was left unchanged. 

Inflation was higher than expected in Chile, which is likely to temper the central bank’s dovish stance. This helped the peso to strengthen. GDP for Q4 was in line with the market’s expectations, while the current account deficit was larger than expected.

In Mexico, the central bank cut rates by 25bps, the first cut of this cycle, however the accompanying statement was still on the hawkish side, suggesting that future cuts will be data driven. Claudia Sheinbaum, who is the current favourite to win the presidential election in early June, has announced that she will increase Mexico’s renewable energy capacity and that most new energy generation will be from renewables. The state-owned oil company Pemex also released its long-term sustainability plan, is targeting net-zero emissions by 2050, and is committed to no more gas flaring by 2030.

A pension fund withdrawal of c.US$8 billion was approved by the economic commission of Congress in Peru, which caused local bond yields to rise. The central bank paused its rate cutting cycle, after February’s inflation was higher than expected.

Colombia’s central bank, Banrep, accelerated the pace of rate cuts as expected, cutting by 50bps to 12.25% in a split vote, with two members voting for a larger cut. Banrep also revised down its end-of-year inflation forecast from 5.9% to 5.4%. Economic data was mixed over the month: activity data was better than expected, but retail sales disappointed. The trade balance was in in line with expectations at a US$1 billion deficit.

Ecuador continues to move closer to an IMF deal, as the government will be phasing out fuel subsidies by the end of 2024 by making small reductions every month. This helped the country’s hard currency bonds to continue their rally.

Polls in Panama are suggesting that a market-friendly candidate is leading in the presidential race, allaying some market concerns around the other more populist candidates.

06

Central and Eastern Europe, Middle East and South Africa

Central and Eastern Europe | Rest of Europe, Middle East and Africa
The South African Reserve Bank kept rates on hold, while increasing uncertainty around the upcoming elections pushed up the country’s bond yields. The Turkish lira came under sustained pressure before rallying after the early April municipal elections, given President Erdoğan’s apparent ongoing commitment to orthodox policymaking.

In Turkey, the lira was under sustained pressure for much of March, with local investors speculating that the currency would be allowed to devalue after the municipal elections at the end of the month. The central bank has also been rapidly spending billions of US dollars to try to stem the lira weakness. It brought in more macroprudential regulations to further tighten financial conditions, before hiking rates by 500bps in a final attempt to help the currency. Interest rates are now at 50%, however inflation is above 70%, and shows no signs of cooling yet. In the aforementioned municipal elections in early April, the ruling AKP Party lost the key Mayor of Istanbul position (among others), in what was a poor outcome for Erdoğan. The lira rallied after the election results, given the president’s continued commitment to an orthodox policy path.

The Bank of Israel was particularly hawkish in its March meeting given the current geopolitical backdrop, and remains concerned about inflation. The political backdrop remains highly uncertain, with increased domestic and US pressure on the Israeli government. At the time of writing, tensions with Iran have also escalated following airstrikes in Damascus.

Core inflation figures were higher than expected in South Africa, mainly due to changes in health insurance prices. The central bank kept rates on hold over the month and sounded slightly more hawkish, partly due to concerns around the impact of the domestic drought on food prices. Increasing uncertainty around the upcoming elections at the end of May caused bond yields to rise.

In Ukraine, the latest debt sustainability analysis from the IMF moderately reduced the country’s debt trajectory and increased the prospect that the upcoming debt restructuring will include a coupon payment over the coming years. This led to a rally in Ukrainian assets. In addition, an uptick in Ukrainian attacks against Russian oil infrastructure put upward pressure on oil prices.

Turning to the Middle East, Saudi Arabia announced an 8% transfer of the state-owned oil company Aramco to the Public Investment Fund (PIF). This will decrease direct government revenue in the budget, which could lead to higher sovereign debt issuance this year.

In Central and Eastern Europe, inflation across the region was generally lower than expected, while the economic recovery remains slow. However, there has been a tentative recovery in PMIs and retail sales. There are signs of core inflation momentum picking up and central banks have been hawkish overall. In Czech Republic, the authorities have started to sound more concerned around the koruna exchange rate and services inflation. This led to the central bank keeping the pace of cuts at 50bps. In Hungary, concerns around the government undermining the central bank weighed on the forint, leading to the central bank cutting interests rates at a more modest 75bps.

In Poland, the opposition party-controlled monetary policy committee continued to highlight inflationary risks and signalled that it will keep rates on hold for rest of 2024. The government has also started the process which could eventually suspend the central bank governor Adam Glapiński, but this will likely be a lengthy process.

Montenegro issued its first US dollar-denominated bond, joining the main JP Morgan EMBI benchmark in the process. The issue was very well subscribed and performed well in the secondary market.

In Bulgaria, at the time of writing, the governing coalition appeared close to breaking up, and new elections would introduce unwelcome political uncertainty ahead of the country’s potential inclusion in the eurozone.

07

EM corporate highlights

Close-up of metal architecture
It was another positive month for EM corporate debt markets, rounding off a strong first quarter, with the JP Morgan CEMBI BD returning 1.0% in March, bringing the year-to-date rise to 2.3%.

It was another positive month for EM corporate debt markets, rounding off a strong first quarter, with the JP Morgan CEMBI BD returning 1.0% in March, bringing the year-to-date rise to 2.3%. The return in March reflected gains by both high-yield and investment-grade bond markets, with the fall in US Treasury yields and spread tightening boosting both. All sectors within the index produced positive total returns, as did the vast majority of countries.

Authored by

EMD Team
Emerging Perspectives - latest insights

Important Information

This communication is provided for general information only should not be construed as advice.

All the information in is believed to be reliable but may be inaccurate or incomplete. The views are those of the contributor at the time of publication and do not necessary reflect those of Ninety One.

Any opinions stated are honestly held but are not guaranteed and should not be relied upon.

All rights reserved. Issued by Ninety One.

Investment Process
Any description or information regarding investment process is provided for illustrative purposes only, may not be fully indicative of any present or future investments and may be changed at the discretion of the manager without notice. References to specific investments, strategies or investment vehicles are for illustrative purposes only and should not be relied upon as a recommendation to purchase or sell such investments or to engage in any particular Strategy. Portfolio data is expected to change and there is no assurance that the actual portfolio will remain as described herein. There is no assurance that the investments presented will be available in the future at the levels presented, with the same characteristics or be available at all. Past performance is no guarantee of future results and has no bearing upon the ability of Manager to construct the illustrative portfolio and implement its investment strategy or investment objective.