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What lies ahead for Emerging Market?

Emerging Markets have been impacted by the COVID 19 crisis, some more severely than others. Strict lock downs are restricting manufacturing, oil production and tourism. The economic consequences for some of them is worth paying particular attention to if you are an exporter.

Last week, Lebanon protests filled news channels as their economy started to falter, resulting in a default of debt. Zambia & Argentina have both missed bond payments and there is a real risk of Argentina entering into default again on May 22 if they don’t service their loans. Brazilian business leaders have also spoken of their concerns about the current leadership of the country and its ability to manage through this crisis. And Ecuador has restructured its debts, agreeing on a break on payments to creditors for four months. The G20 group of countries have provided additional assistance, but this does not help countries that have borrowed from private creditors, e.g. pension funds.

At this point, we cannot be sure how severe or how long this will economically impact EM economies, but we do know that they have to sustain their debts to avoid default – some countries have borrowed heavily in recent years. Stronger EM economies will do better than others because they have been and perhaps will still be able to borrow at lower rates. Others will not be so fortunate. One reason for this is that Investors want dollars and euros only (to buy imports and service debt), so if foreign exchange rates drop, the debt is harder to service and investors will want higher risk premiums.

We will continue to watch debt distress levels for EM countries in the coming weeks and months. Defaults are likely, so exporters should look to protect themselves, e.g. credit insurance.

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