Alarm bells ring again for emerging debt

    235

    Much like evidence of an unequal COVID impact within western economies, 2020 raised obvious concerns about a disproportionate hit to poorer emerging economies most reliant on travel, trade and commodities and with weaker health systems.

    By Mike Dolan

    LONDON- Even if the pandemic-related debt explosion can be managed by the world’s biggest economies, last week’s bond market ruckus put large swathes of the developing world on notice yet again.

    Worryingly, there are some fears the episode may signal far more than another tactical retreat by financial traders and could potentially mark an era-defining shift in the debt calculus for some of the biggest emerging economies.

    Much like evidence of an unequal COVID impact within western economies, 2020 raised obvious concerns about a disproportionate hit to poorer emerging economies most reliant on travel, trade and commodities and with weaker health systems.

    Countries with already heavy debt burdens also had, unlike the major economies, limited ability to simply print their own currencies to fund those debts for fear of exchange rate crises stoking inflation and foreign investor strikes.

    A flooring of Western borrowing rates and a sharp weakening of the US dollar alleviated the bind for countries with hard currency borrowing and market access – as did the yearend investor rush to rotate into the most beaten-down assets to anticipate a vaccination-led global bounceback.

    But the resilience of the dollar this year against an overwhelmingly negative consensus and last week’s surge in benchmark US Treasury yields – as traders try to price an exceptional, stimulus-led rebound in nominal US growth of up to 10 percent this year – saw many banks raise red flags once again.

    US banks JP Morgan and Morgan Stanley and others rushed to warn about a hit to emerging currencies akin to 2013’s ‘taper tantrum’ in Treasuries, which preceded a slowing in Federal Reserve bond buying back then. It was an event from which many emerging markets have never fully recovered as tighter dollar credit was quickly followed by US-China trade wars and long-term doubts about globalization at large.

    “The negative effects from the higher US interest rates will overwhelm the positive effects coming from a higher US growth rate and we may have just passed that tipping point,” wrote Eurizon SLJ hedge fund manager Stephen Jen, explaining a decision to turn pessimistic on emerging FX this week.

    But Barclays economists Marvin Barth and Marek Raczko think that tipping point may have many far reaching consequences.

    Unlike the rebound from the global banking crash 12 years ago, rising real borrowing rates will likely hit emerging market debtors hard after a decade of falling potential growth and ebbing globalization.