Key points:
- A number of headwinds – tighter financial conditions, a China slowdown and trade tensions – created a challenging backdrop for emerging markets in 2018.
- However, emerging-market stress has been confined to countries with weak fundamentals or political instability, such as Turkey and Argentina.
- Emerging-market sovereigns should therefore no longer be considered a single asset class. Instead, they should be grouped together based on different credit qualities and their ability to pay their external debt obligations.
- Today, emerging-market economies are better placed to weather negative shocks than in the past: financial systems are more resilient; better policies have been implemented; there are fewer currency pegs; and the majority of central banks are independent.
- In addition, recent cross-border lending data (levels and growth rates) from the Bank of International Settlements (BIS) suggests that financial stability risks have receded compared to 2007.
- The reliance on US dollar-denominated credit in emerging markets is still pronounced. But there are mitigating factors: emerging markets hold substantial foreign exchange reserve.
- However, bouts of financial disruption may look different in the future. For example, the shift in financial intermediation from banks to capital markets means that the corporate sector is more vulnerable to a snap-back of long-term interest rates and increased volatility than before the global financial crisis.
- We maintain a cautiously constructive outlook for emerging markets. We believe that some emerging market economies may be well placed to benefit from a small number of tailwinds in 2019. READ MORE
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