Emerging Market Debt Commentary: October 2022

Emerging market debt experienced pockets of respite towards the end of October, exhibiting some stability after the volatility and headwinds of the third quarter. Despite rigidity in EM fundamentals, the possibility that the US Federal Reserve might be more measured in its monetary tightening approach going forward provided some relief, as did a partial recovery of EM currencies against USD and retracements in bond yields. The particular inflation dynamics among various EM economies mandated EM central banks to act at different times and with varying magnitudes. This is especially the case in EMEA and Latin America (LatAm), where the tightening cycle is more advanced, and where inflation is expected to peak in Q4.

A key factor in early October was OPEC’s (Organization of the Petroleum Exporting Countries) move to cut its crude oil production by 2 million barrels per day, starting in November. This should bolster prices and benefit the EM oil exporters. China has maintained its focus on policy continuity, with no immediate actions announced on potential reopening and growth stimulus. The meeting between the International Monetary Fund (IMF) and World Bank (WB) in mid-October did little to address investor concerns about the global macro outlook and downside risks were highlighted. Tunisia and Egypt indicated they were close to agreements with the IMF for funding.

In EM sovereign credit, year-to-date spreads have widened to their highest in a decade. This impacted investor sentiment, raising further concerns about the outlook for capital flows into EM bond funds.

During October 2022, hard currency outflows were -$4.4bn, while local currency outflows amounted to -$5.6bn, according to JP Morgan.