December 2, 2022

Emerging Markets face record bond outflows amid global turbulence

Emerging markets have seen a record $70 billion in outflows as rising interest rates and a strong dollar ratchet up pressure on developing economies, the FT’s Jonathan Wheatly reports. The strong outflows, including $4.2 billion from bonds last week alone, come despite an $86 billion wall of dollar-denominated debt maturities EM governments will pay by the end of 2023, according to Dealogic data.

An expedited tightening cycle led by a hawkish Fed has prompted investors to pile into the treasury market, and other developed markets which have been forced to follow US monetary policy. As EM assets have become relatively less attractive, JP Morgan revised its yearly outflow projections from $55 billion to $80 billion. The hit has been broad and deep, with just seven weeks of inflows for the entire year and outflows hitting local and foreign currency bonds alike.

As volatility and illiquidity haunt debt markets globally, the risk of financial stress for EMs, which also have to contend with more expensive imports, has risen substantially. These risks led the UN to urge global central banks to halt increases before a full-fledged debt crisis hits developing economies. While central banks have little choice but continue to raise rates, the long lag in monetary policy’s effects means the UN’s unheeded warning might already be too late.

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