“This is an acute period of challenge for many developing countries,” Muaddi said.
Risk aversion has also spread to active traders who are snapping up insurance against default in emerging markets. The cost is lingering just below the peak seen when Russian troops invaded Ukraine earlier this year.
“Things can get worse before they get better,” said Caesar Maasry, head of emerging-market cross-asset strategy at Goldman Sachs Group Inc., in a Bloomberg Intelligence webinar. “It’s late cycle. There’s not a strong recovery to buy into.”
That’s sent foreign money managers marching out of developing economies. They pulled $4 billion out of emerging-market bonds and stocks in June, according to the Institute of International Finance, marking a fourth straight month of outflows as Russia's invasion of Ukraine and the war’s impact on commodity prices and inflation dragged on investor sentiment.
“This could have really long-term impacts that actually change the way we think about emerging markets, and in particular, emerging markets in a strategic context,” said Gene Podkaminer, head of research at Franklin Templeton Investment Solutions. “The first thing it does is to reaffirm the reputation of emerging markets — they are volatile. There were certainly periods of time when investors perhaps had forgotten that, but it’s hard to ignore that fact now.”
Ballooning bond spreads are also a special concern for central bankers, who are seeing an increasingly stark trade-off between tightening interest rates to protect currencies and damp inflation versus staying accommodative to help keep fragile post-Covid recoveries on track. Multilateral institutions like the International Monetary Fund have also have warned of further on-the-ground strife associated with the burden of soaring costs of living, especially where governments are ill-placed to provide a cushion for households.
Sri Lanka’s political turmoil was fanned by sweeping electricity cuts and surging inflation that deepened inequality. That’s something Barclays Plc analysts led by Christian Keller warned could be repeated elsewhere in the second half this year.
“Populations suffering from high food prices and shortages of supplies can be a tinderbox for political instability,” his team wrote in a mid-year report.
El Salvador
The Central American nation’s rating has been slashed by credit assessors as its dollar bonds slumped, driven by the sometimes-unpredictable policies of President Nayib Bukele. The adoption of Bitcoin as legal tender, plus moves by Bukele’s government to consolidate power, has spurred concern about El Salvador’s ability and willingness to stay current on foreign obligations — especially given its wide fiscal deficits and an $800 million bond coming due in January.
Ghana, Tunisia and Egypt
These nations are among the less-frequent and lower-rated borrowers with low reserve buffers that Moody’s Investors Service warns will be vulnerable to rising borrowing costs. The African sovereigns have relatively low amounts of foreign reserves on hand to cover bond payments coming due through 2026. That could become an issue if they are unable to roll over their maturing notes due to the increased cost of tapping foreign debt markets. Ghana is seeking as much as $1.5 billion from the IMF. Egypt has almost $4 billion due on external debt in November 2022 and another $3 billion in February 2023, according to data compiled by Bloomberg.
Pakistan
Pakistan just resumed talks with the IMF as it runs thin on dollars for at least $41 billion of debt repayments in the next 12 months and to fund imports. Reminiscent of events in Sri Lanka, protesters have taken to the streets against power cuts of as long as 14 hours that authorities have imposed to conserve fuel. While the finance minister said the nation has averted a default, its debt is trading in distressed levels.
Argentina
The South American nation is lingering in distress after the most recent of its nine defaults, which took place in 2020 during a pandemic-fueled recession. Inflation is expected to top 70% by year-end, adding to pressure on authorities to limit the flight of dollars out of the economy to control the exchange rate. At the same time, a new finance minister and political infighting between President Alberto Fernandez and his Vice President Cristina Fernandez de Kirchner have clouded the outlook for the economy ahead of elections in 2023.
Ukraine
The invasion of Russian troops has led to the exploration of debt restructuring by Ukrainian officials as the war-ravaged country’s funding options are at risk of running out, according to people familiar with the discussions. The nation has also indicated that it needs between $60 billion and $65 billion this year to meet funding requirements, billions more than its allies have so far been able to pledge. Policy makers in Kyiv are struggling to keep the budget running as the military fends off Russia’s invasion, which has destroyed cities, brought the nation’s key grain exports to a standstill, and displaced more than 10 million people. The nation also unveiled a longer-term reconstruction plan that could exceed $750 billion.
--With assistance from Ziad Daoud, Libby Cherry, Maria Elena Vizcaino, Michelle Jamrisko, Scott Johnson, Boingotlo Gasealahwe and Jenny Sanchez.
This article was provided by Bloomberg News.