Always look on the bright side of life
By Natalia Gurushina, Chief Economist, Emerging Markets, VanEck.
Evergrande’s story in China is still unfolding, but it’s important to remember the strengths of MEs (especially on the external side) that create places to hide when the going gets tough.
Problems, risks and disasters tend to get a lot of attention, both in the investment community and in the press. Evergrande’s story in China is still unfolding – and we’ve seen it weigh on some top rated property names. But he is equally important to remember that emerging markets (EM) have many strengths these days – external balances is one of them. We say this not to put us in a good mood before the weekend, but because these strengths create a place to hide when times get tough. We discuss some of these issues in more detail in our Monthly Emerging Bond Commentary.
First of all and above all, the proliferation of orthodox monetary policies in EM has paved the way for manual current account adjustments during the COVID crisis. Emerging markets ended last year with an overall current account surplus of 1.08% of GDP (up from 0.25% of GDP in 2019). And this process is still going on in many places – the consensus currently sees a new large surplus this year (0.93% of GDP). Orthodox policies (= allowing currencies to be impacted rather than intervening on currencies) and the resulting current account adjustments are the main reason why most emerging countries have succeeded in preserving and / or increasing their international reserves over the past year and a half. It is External force # 2, and it is directly linked to the performance of EM sovereign bonds.
Ultimately, remittances abroad from ME will probably normalize at some point, but right now they look amazing (see table below). These are not trivial numbers – we’re talking about something like 8-8.5% of GDP in the Philippines and 3.8% of GDP in Mexico. It is a major supporting factor in terms of domestic consumption and growth in recipient countries, especially against headwinds created by COVID epidemics, limited room for maneuver for additional budget support and potentially more growth moderation in China. Stay tuned!
At a glance at the graph: At a glance at the graph: Foreign remittances from emerging countries are on the rise
Source: VanEck research, Moody’s
Originally posted by VanEck on Sep 17, 2021.
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