Global | So far, so good for EM financial conditions
Emerging market financial conditions bottomed out in May, but many EMs still have some ground to cover. China is doing well, but others are struggling. Worryingly, they’re not only the usual suspects like Argentina but also the second-largest EM, India.
Recent dollar weakening has bypassed EMs completely, with all their currencies depreciating significantly against the dollar. This can pose a problem for those that are heavily exposed to cross-border and domestic FXdenominated debt. But most have managed to build up foreign reserves and, with a bout of deflationary pressure, stay on their way to recovery.
Prudent macro policy of the past decade now allows for better-anchored inflation, monetary policy easing across the EMs, and a significant fiscal boost in many. The 2020 increase in the public debt-to-GDP ratio is averaging 10%.
Risk perception also partly reflects this, with EMBI sovereign spreads recovering rapidly in all EMs, though plenty of ground remains to be covered in the riskiest ones.
As in advanced economies, private sector credit across EMs remains high, at about the decade’s average for most, and equity markets have recovered a lot of the losses in local-currency terms, though much less in dollar terms, as expected.
Were it not for the rising risk of a second pandemic wave, making the prospects bleaker and less predictable, one could say EMs have weathered the pandemic financial challenges well. Still, we can only say: So far, so good.