Vontobel: systemic risk in EM unlikely

Added 13th October 2015

Healthy foreign debt positions in most emerging markets make the possibility of systematic risk remote, despite the recent massive currency and commodity declines, said Rajiv Jain, chief investment officer at Vontobel Asset Management.

Vontobel: systemic risk in EM unlikely

Most key countries that still maintain a currency peg have significant foreign exchange reserves, which make a crisis much less likely, according to a research note by Vontobel. The ratio of EM countries’ short-term FX debt to FX reserves is much lower than it was in the mid-1990s, when the Asian currency crisis began to spread.

Total capital flows into EM have turned sharply negative in the past three months but this was all due to China, and there have not yet been aggregate outflows excluding China, according to Vontobel.

Though EM corporate debt has risen in the last few years and some of it is FX-denominated, the total public and private debt burden is still manageable for most of those countries, said Jain.

Only a handful of EM countries have dangerously high amounts of US dollar-denominated debt, the most extreme case being Ukraine. Turkey and South Africa are also high risk due to significant current account deficits coupled with great FX debts.

However, for most EM countries, high current account deficits are not a major problem, Jain said.

Though there is no high risk of a systemic EM crisis with significant macroeconomic implications, Jain was not sure when asset prices would recover.

Economic growth should continue to rise at a faster rate than developed economies, even though it has moderated over the past few years, he said.

Long-term positive trends, such as the expanding middle class, growth of working-age populations and expansion of the private sector, improved infrastructure, and urbanisation, will contribute to EM growth, he added.

“The recent broad-based emerging market sell-off presents attractive value opportunities for a long-term investor, though short-term risk persists.”

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