By Natalia Gurushina, Chief Economist, Emerging Markets, VanEck.
China’s Evergrande story is still unfolding, but it is important to remember EM strengths (especially on the external side) which create places to hide when things get tougher.
Problems, risks, and disasters tend to attract a lot of attention – both in the investment community and in the press. China’s Evergrande story is still unfolding – and we saw it weighing on some higher-rated property names. But it is equally important to remember that emerging markets (EM) have a lot of strengths these days – external balances is one of them. We are saying this not to boost our mood before the weekend, but because these strengths create a place to hide when times get tougher. We discuss some of these issues in greater detail in our EM bond monthly commentary.
First and foremost, the proliferation of orthodox monetary policies in EM paved the way for textbook adjustments of current accounts during the COVID crisis. EMs ended up the last year with an aggregate current account surplus of 1.08% of GDP (vs. 0.25% of GDP in 2019). And this process is still on-going in many places – the consensus currently sees another large surplus this year (0.93% of GDP). Orthodox policies (=allowing currencies to take a hit rather than conducting currency interventions) and the ensuing current account adjustments is the major reason why most EMs managed to preserve and/or boost their international reserves in the past year and a half. This is External Strength #2, and it is directly related to the performance of EM sovereign bonds.
Finally, EM overseas remittances will probably normalize at some point, but right now they look incredible (see chart below). These are not insignificant numbers – we are talking about something like 8-8.5% of GDP in the Philippines and 3.8% of GDP in Mexico. This is a major supporting factor as regards domestic consumption and growth in the recipient countries, especially against headwinds created by the COVID outbreaks, limited room for additional fiscal support, and potentially more growth moderation in China. Stay tuned!
Chart at a Glance: Chart at a Glance: EM Overseas Remittances Going Strong
Source: VanEck Research, Moody’s
Originally published by VanEck, September 17, 2021.