Emerging Market Debt Market Commentary: April 2023

Emerging market (EM) debt in April benefited from recent macro tailwinds even in the midst of debt sustainability concerns. Investor conviction initially appeared low in the month as they sought further clarity on the Fed’s policy path. Investor sentiment is skewed towards the outcome of the Fed’s forthcoming meeting and the broader US economic outlook. However, the Fed’s decisions are expected to have a relatively low impact on the policy stances of central banks in most EM economies, where domestic inflation dynamics dominate tightening cycles. Financial stability concerns that stemmed from banking sector turmoil in the US and Europe appear to have faded, helped by stronger US bank earnings. Easing inflation risks provide support for the cumulative policy tightening decisions undertaken by EM central banks to date. The US dollar weakened during the month amid US fiscal tightening dynamics and the continued trend towards normalization in China. US dollar depreciation benefited the high beta EM currencies. China’s Caixin manufacturing purchasing managers’ index (PMI) surprisingly dipped to 49.9 in April from 50.0 in March, marking the first contraction since January (50 marks the level between expansion and contraction). However, sentiment showed improvement following supportive state policies and a decline in input costs. A rebound in crude oil prices (depicted by the WTI Index in Figure 2 below) impacted the performance of Latin American countries with a higher beta towards commodity prices. Volatility across global markets eased from the heightened levels seen in March, helping slow the pace of outflows from EM assets in April. Net flows during April for hard currency and local currency funds were -$1.5bn and -$0.2bn, respectively (source: JP Morgan).