Recession angst prompts focus on EM growth engines

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As inflationary panic gives way to fears of a global recession, emerging market investors are also turning to countries where interest rates are still low.

Investors bought local bonds from Indonesia and Thailand, where benchmark rates had hovered around record lows to which they were cut at the height of the pandemic. The same thing happened with India’s debt, where the central bank made only one hike.

That’s a reversal from the early months of the year, when low-yielding bonds were dumped in favor of debt from countries like Brazil and Chile, which led the global tightening cycle. But with recession fears replacing price worries in recent weeks, even as inflation continues to stoke pain from Sri Lanka to Argentina, having high interest rates is no no longer considered the advantage it once was. It could even be seen as a disadvantage when low inflation and growth prevail.

“These countries will be in a better position to fight a global slowdown, but they are in this position because the rise in inflation in these Asian countries has lagged behind other countries,” said Sébastien Barbe, head of Emerging Markets Research at Credit Suisse. Agricultural IPC. “Countries with already high inflation a few months ago had fewer options to keep rates low.

Of course, while some countries will benefit from investors’ focus on growth, others will look even weaker. According to data compiled by Bloomberg, there is $237 billion of emerging market sovereign debt trading at distressed levels. And a high-profile default by Sri Lanka – which is in the midst of negotiations with the International Monetary Fund and is set for a new prime minister and president – has raised concerns about the possibility of more defaults. follow.

Still, Central Asia and Asia-Pacific are the only two emerging market regions to offer local-currency bond investors positive returns this month, according to a Bloomberg index. The worst performers, meanwhile, are Latin America and Eastern Europe.

Of the eight Asian countries in a Bloomberg Emerging Markets Local Debt Index, two have yet to start raising rates, while the others haven’t risen more than 90 basis points since the start of the month. their tightening cycles. The only exception is South Korea, which raised rates by 135 basis points.

Meanwhile, all Latin American countries in the gauge have raised borrowing costs, with Chile and Brazil rising 850 and 1,125 basis points respectively in the current cycle. In Eastern Europe, Poland tightened by 640 basis points. There have also been calls for bolder action by the central bank to strengthen currencies to hedge against inflation.

“With evidence of inflation still high in the United States and it becoming clear that the Fed should tighten aggressively, earlier tightening by emerging market central banks mattered less,” said Razia Khan, head of the research at Standard Chartered Bank in London. “Growth issues are also manifesting more broadly.”

India is expected to grow by 8.7% this year, according to a Bloomberg survey, and the central bank announced its first hike of the cycle just three months ago. Economists, meanwhile, see Indonesia’s gross domestic product at 5.2% in 2022. Policymakers there reiterated their commitment to keeping interest rates at a record low of 3.5%.

This is in stark contrast to Chile and South Africa, where economic growth could reach 2.1% this year. In Brazil, the economy is only expected to grow by 1.3%, according to the same survey.

“The Asia region is interesting right now,” said Valerie Ho, portfolio manager at DoubleLine Group in Los Angeles. “Asia tends to be more isolated and it tends to perform better in these episodes. He also hasn’t seen the price pressures that Latin America and Central and Eastern Europe are experiencing.

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