Emerging Market Debt Indicator February 2023
Following a recent trip to Brazil and Mexico, Christine Reed reports on a deeply contrasting picture. In addition, the wider investment team provides an update across the EM debt universe.
The challenges facing EM fixed income of high inflation, tighter monetary policy and geopolitics remained front-of-mind for investors. In the US, inflation surprised on the upside and the yield on 10-year Treasuries rose to 4.05%.
In Egypt, the IMF approved a US$3 billion Extended Fund Facility program. The country also moved to a flexible exchange rate regime. In Ghana, domestic challenges accelerated, with the currency coming under significant pressure from a combination of local dollarisation and portfolio outflows.
The overarching themes from China’s 20th Party Congress were policy continuity and Xi Jinping cementing his control of party structures. The US administration issued a ban on the transfer of US semiconductor technology to China. Several central banks tightened monetary policy.
Brazil’s left-leaning former President Luiz Inácio Lula da Silva (‘Lula’) won the presidential election, beating right-wing incumbent President Jair Bolsonaro by a small margin. Chile’s central bank’s efforts to reduce inflation and slow down the economy began to bite. Ecuador’s president announced a potential hard currency bond buy-back, which sparked a bond market rally.
Central and Eastern Europe
Inflationary momentum accelerated across the region, even in the Czech Republic, where there had been some more encouraging signs. Hungary’s central bank was forced into an emergency rate hike due to the acute sell-off in the forint.
Rest of Europe, Middle East and Africa (EMEA)
Russia increased its military activity targeting civilian infrastructure over the month, as it struggled to make gains on the battlefield. In Turkey, the central bank cut rates by another 150bps, despite inflation being well over 80%. In South Africa, year-on-year inflation fell for the second month in a row.
EM corporate debt highlights
The macro backdrop continued to weigh on bond prices. Spreads widened, particularly in Asia, as China’s zero-COVID approach weighed on China, Hong Kong and Macao, and a lack of a material change in narrative from China’s 20th Party Congress disappointed some market participants.
General risks. All investments carry the risk of capital loss. The value of investments, and any income generated from them, can fall as well as rise and will be affected by changes in interest rates, currency fluctuations, general market conditions and other political, social and economic developments, as well as by specific matters relating to the assets in which the investment strategy invests. If any currency differs from the investor’s home currency, returns may increase or decrease as a result of currency fluctuations. Past performance is not a reliable indicator of future results. Environmental, social or governance related risk events or factors, if they occur, could cause a negative impact on the value of investments.
Specific risks. 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.