Strong liquidity support from both developed market (DM) and emerging market (EM) central banks, sizeable fiscal packages from governments around the world, and some easing in select EM countries’ funding strains through USD swaps with the Fed, have all helped to improve risk sentiment in EM. This helped to partially reverse the sharp sell-off between mid-February and mid-March. Sentiment was further boosted in late April by positive preliminary findings from an anti-viral drug trial. Most EM countries remain in some form of a lockdown, though they are expected to gradually reopen their economies over the coming months.
A sharp collapse in oil demand and technical factors in the futures market led to renewed volatility in oil markets, which is a concern for EM investors, given historical correlation of EM performance to oil. This has raised questions on the longer-term viability of oil production, particularly for those countries where marginal production costs are higher than the current level of oil prices. Some EM countries with weak balance sheets and economies, which were further exacerbated by COVID-19, have started debt restructuring and negotiations with bondholders and other creditors.
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