Emerging Market Debt Commentary: April 2022

Emerging markets (EM) underwent a sharp correction in April 2022 as the macro backdrop for the EM asset complex became more challenging amid growth fears emanating from China and a significant pick-up in inflation globally. Inflation in EM Asia, which had been reasonably benign, moved higher as well amidst surging commodity prices which fed through to the consumer price index (CPI). This prompted most of the EM Asia central banks to adopt a measured removal of the accommodative stance maintained thus far. In contrast, the Latin American central banks are at the late stage of their tightening cycles, while central and eastern European (CEE) central banks are in the middle of their cycles.

US CPI inflation surged yet again as the March headline CPI rose by 8.6% year-on-year (y/y). The US Federal Reserve became more hawkish and has indicated its intention to front-load interest rate hikes and normalise their balance sheet at a faster pace than initially projected. The rate hike expectations became more aggressive and based on the implied rate hikes priced in Fed Fund Futures, the policy rate is now expected to reach 3.0% by the end of 2022 (as of 29 April, source: Bloomberg); at the end of March, the market was pricing in a rate of 2.5% by year-end (see Figure 1). Demand for ‘safe haven’ assets, along with the support provided by higher interest rates saw the US dollar outperform against most EM and developed market (DM) currencies since the start of the year. Similarly, EM hard currency spreads widened as concerns around the debt servicing capabilities of a few EM countries increased, especially those economies rattled by current macro headwinds and idiosyncratic geopolitical events. Over April 2022, hard currency outflows were -$0.9bn, while local currency outflows amounted to -$2.9bn. (source: JP Morgan)