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Roula Khalaf, Editor of the FT, selects her favourite stories in this weekly newsletter.
The writer is head of emerging markets fixed income at UBS Asset Management
For investors in emerging markets bonds, the narratives are seldom straightforward. Ahead of polls in India, Mexico and South Africa, some investors had seemed too complacent about the risks. But the negative market reaction to those elections belies much more positive developments in emerging economies — particularly in countries traditionally considered more vulnerable.
As a result of effective monetary policies, emerging markets economies have been particularly quick to control inflation and were able to initiate a rate-cutting cycle last year. This proactive approach is anticipated to provide crucial support for economic growth in 2024. A case in point is the Brazilian central bank, which raised rates at 12 consecutive policy meetings from a low of 2 per cent in March 2021 to 13.75 per cent to curtail inflation.
Against the backdrop of tighter financial conditions in developed markets, macroeconomic policies in many emerging market countries have undergone significant improvements. Such positive developments have been instrumental in reducing the risk premium associated with investing in these nations from prohibitively high levels last year. Structural reforms, fiscal discipline and adoption of flexible exchange rate regimes have helped mitigate risks and strengthen policy credibility.
Overall, the benchmark JPMorgan Emerging Market Bond Index Global Diversified index rose 11.09 per cent last year and is up 2.62 per cent this year. But we believe investors should be looking at the many countries seeing improved economic management.
Take, for example, Argentina, which for the first time elected a president whose main campaign promise was to slash expenditure. Upon getting elected, President Javier Milei demonstrated his commitment to stabilising the economy by delivering a fiscal surplus plan and made progress on an unprecedented omnibus reform bill. While there has been some retracement in the past month, an index of hard currency bonds is still up 62.8 per cent since Milei was elected last November.
There are similar improving outlooks in Africa. One of the first acts by the new president of Nigeria, Ahmed Tinubu, who took office last year, was to tackle corruption. The new central bank governor, Olayemi Cardoso, expressed a commitment to transparency, to clear backlogs of foreign exchange obligations to local lenders and to restore faith in the central bank.
Kenya, considered a default candidate last year by many investors, demonstrated commitment to reforms and procured a new IMF programme. The country was able to issue a new bond this year that was well oversubscribed.
Egypt has shown a commitment to reducing debt with asset sales and recently announced one of the biggest investment deals in its history. Authorities successfully negotiated an IMF programme that unlocked significant funding for the country.
Indeed, multilateral agencies and lenders such as the IMF are providing unprecedented liquidity support to emerging economies. The list of countries that are committed to structural reforms and pursuing IMF programmes is quite extensive. Pakistan, Ghana and Sri Lanka are among those in a programme or at various stages in the negotiations.
Even in an environment of higher-for-longer interest rates, emerging market economies should be able to refinance at attractive rates. Lack of access to capital markets, a key vulnerability marker, is unlikely to be an issue in 2024. The usual front loading of new bond supply in 2024 has been well received, with new issuance significantly oversubscribed and outperforming in the secondary market.
In the case of India, Mexico and South Africa, the election results are likely to lead to changes in their policy mix, and it is uncertain whether these changes will be favourable for investors. The medium-term positive narrative continues to be intact for the countries, but despite the volatility after elections we believe that investors need to look at whether there is an adequate risk premium.
We must also consider the butterfly effect on emerging market countries with US elections approaching. Although we can’t predict whether history will repeat itself, investors will remember that when Donald Trump unexpectedly won the presidential election in 2016, the ensuing sell-off in emerging markets was reversed in a matter of weeks and dollar strength was also reversed in a few months. Volatility is always an opportunity for investors.
