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Past performance is no guarantee of future results.
By Sabrina Khanniche, Senior Economist
Pre-pandemic, vulnerabilities in some EM economies had mounted amid slowing economic growth. As Fig. 1 shows, countries in the bottom right (Brazil, Egypt, Ukraine, South Africa) had limited fiscal space going into the health crisis as they already had high public-debt-to-GDP ratios.
Source: Pictet Asset Management, CEIC, Refinitiv, Bloomberg
Since the onset of the current crisis we have seen a surge in debt ratios as recession hit. For the moment there is a tolerance in markets towards higher fiscal deficits and public debt (that we closely monitor), but actions to restore fiscal sustainability will be required once the recovery gets underway.
Our proprietary ‘Debt Sustainability Score’ looks for a potential negative drift in government indebtedness before it becomes irreversible, using a range of tested inputs. Our ‘Shorter-Term Debt Score’ model detects shorter-term momentum shifts based on quarterly inputs. In fig. 2 below we combine the latest readings of both models.
Source: Pictet Asset Management, CEIC, Refinitiv, Bloomberg
This chart shows us two things. First it identifies countries with good debt dynamics in the green quadrant: Taiwan particularly and Eastern Europe, especially Bulgaria. Conversely the red quadrant shows us less favourable markets: foremost Brazil (of which more from our EM debt team below), South Africa and Egypt.
Second it flags markets which are seeing short-term shifts that might point to improvements or deteriorations in their longer-term debt sustainability score.
Improving on the margin are Chile and Turkey.
Meanwhile a range of markets are seeing short-term deteriorations with possible long-term consequences: foremost the Philippines, but also Malaysia, China and Romania.
By Mary-Therese Barton, Head of Emerging Market Debt
Brazil has been one of the worst affected countries during the Covid-19 crisis, with a large number of virus cases, significant restrictions and economic disruption.
The fiscal and monetary policy response has been timely and very powerful – involving large social transfers and a significant widening in fiscal balances as well as monetary policy easing and liquidity provision.
The large fiscal impulse in Brazil presented below, during a time of mounting debt to GDP, has unsettled market participants. Very low interest rates have also weighed on the currency, further exacerbated by a difficult environment for EM FX globally.
Source: Pictet Asset Management, CEIC, Refinitiv
Source: Pictet Asset Management, CEIC, Refinitiv
Restoring fiscal credibility in Brazil together with an improving growth/virus picture, strong commodities backdrop and a positive external balance picture should translate into a reversal of this year's significant underperformance. Of course, if there is evidence that the spending cap is not being respected it could mean further currency weakness, as the debt sustainability issue becomes the dominant driver of Brazilian assets.
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This document is used for informational purposes only and does not constitute, on Pictet Asset Management part, an offer to buy or sell solicitation or investment advice. It has been established on the basis of data, projections, forecasts, anticipations and hypothesis which are subjective. Its analysis and conclusions are the expression of an opinion, based on available data at a specific date. The effective evolution of the economic variables and values of the financial markets could be significantly different from the indications communicated in this document.
Information, opinions and estimates contained in this document reflect a judgment at the original date of publication and are subject to change without notice. Pictet Asset Management has not taken any steps to ensure that the securities referred to in this document are suitable for any particular investor and this document is not to be relied upon in substitution for the exercise of independent judgment. Tax treatment depends on the individual circumstances of each investor and may be subject to change in the future. Before making any investment decision, investors are recommended to ascertain if this investment is suitable for them in light of their financial knowledge and experience, investment goals and financial situation, or to obtain specific advice from an industry professional.
The value and income of any of the securities or financial instruments mentioned in this document may fall as well as rise and, as a consequence, investors may receive back less than originally invested. Risk factors are listed in the fund’s prospectus and are not intended to be reproduced in full in this document.
Past performance is not a guarantee or a reliable indicator of future performance. Performance data does not include the commissions and fees charged at the time of subscribing for or redeeming shares. This marketing material is not intended to be a substitute for the fund’s full documentation or for any information which investors should obtain from their financial intermediaries acting in relation to their investment in the fund or funds mentioned in this document.
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