Bonds from developing countries are being sold off in what one emerging-markets fund manager called “the worst start I can remember across the asset class and I’ve been doing EMs for more than 25 years,” the Financial Times reports.
What with the aftereffects of the pandemic, the war in Ukraine, rising inflation, and lower global economic growth, things are looking down for emerging markets. The FT quotes David Hauner of Bank of America Global Research:
Hauner said that rate rises in major developed market economies were not necessarily bad for EM assets if they were accompanied by economic growth. “But that is not the case now — we have a major stagflation problem and central banks are raising rates to kill rampant inflation in some places, such as the US. This is a very unhealthy backdrop for emerging markets.”
The largest emerging market, of course, is China, and it looks to be in deep trouble. An economist at the Institute of International Finance told the FT that he expects negative outflows in the Chinese bond market for the rest of the year.
Other developing countries will be affected as well. The FT reports that fund managers aren’t moving investments out of China into other emerging markets; they are leaving emerging markets entirely. As interest rates increase in major economies and inflation takes a larger bite out of returns, managers are rushing to the safer returns in wealthier countries instead of the riskier propositions in the developing world.
Countries with stronger ties to Russia are facing the steepest losses, with Hungarian bonds losing 18 percent over the past year, the FT says. Brazilian bonds, on the other hand, are up 16 percent over the same period, as the country’s exports have benefited from higher prices.
Sri Lanka appears to be the first developing country to undergo serious collapse, with especially poor leadership within the country a major contributing factor. But with food and other commodities becoming more expensive in the global marketplace, other poorer countries will feel the heat soon.
One of the many advantages of living in a wealthy country with a diversified economy is that even severe global downturns can be weathered without a major collapse in institutions or the economic system at large. The jury’s still out on whether a severe global downturn is on the way (although Jamie Dimon is not sounding optimistic these days), but even a relatively mild one can shake developing countries hard.
A world where international ties are strengthening and interest rates are low is very different from one where international ties are disappearing and interest rates are rising. Many had become accustomed to the former, but Russia’s war in Ukraine and China’s increasing authoritarianism are pushing countries apart, and central banks around the world are raising interest rates in efforts to lower inflation.
Economic growth is a big deal for everyone, but it’s an especially big deal for developing countries, where it means major material improvements in people’s standard of living and better health outcomes. The reversal of economic growth can be a cause for protests and demonstrations, and in some cases, revolts. As the leader of the free world, the U.S. must be prepared for the international fallout from economic disruptions and beware of an economically wounded China under an increasingly authoritarian leader.