Latin America Could Weigh on EM Bond ETFs in 2019

Related: Treasury Bond ETFs Are Rallying with Benchmark Yields Slipping Below 3%

Rising external financing costs and current account deficits are among the factors plaguing emerging markets debt this year. Some analysts and market observers believe the scenarios confounding emerging markets bonds this year could linger into 2019.

“While the overall growth environment is expected to improve somewhat, with regional GDP growth (excluding Venezuela) accelerating to 2.1% in 2019 versus an estimated 1.5% this year, downside risks persist. Brazil is expected to recover and Mexico’s growth will remain relatively stable in 2019, but any disappointment with reforms and/or deterioration in the policy environment could undermine investor confidence and growth in both countries,” according to Fitch.

Mexico, Latin America’s second-largest economy behind Brazil, is EMB largest geographic exposure. Those two countries combine for over 9.5% of the fund’s weight.

“Tougher external financing conditions will continue to be a macroeconomic theme for the region next year and will be a greater challenge for countries with larger current account deficits, limited FDI, weak liquidity and high US dollar-denominated government debt,” said Fitch.

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