AsianInvestor’s editorial team set out this month to ask and answer 10 key questions for the Year of the Monkey, having consulted a range of industry experts.
Here we present our response to question number five, with the other forecasts so far listed at the end of the article. The feature appears in full in the forthcoming (February) issue of the magazine.
Question 5: Will there be a crisis in emerging market debt in 2016?
It’s premature to think there will be a crisis this year: China has the flexibility to manage its slowing growth and the region as a whole is better placed to weather volatility.
A sharp depreciation of the RMB could cause problems because it puts pressure on other emerging market currencies to weaken. And such devaluations make it harder for EM companies to roll over loans and pay foreign currency debts, which expanded riotously amid the years of easy US monetary policy.
But it’s important to note the majority of EM debt is denominated in local currencies held by domestic investors, who also make up a growing proportion of EM dollar debt. They will be more resilient to a strengthening dollar.
Moreover, emerging market countries have largely adopted floating rate regimes, giving them flexibility in the event of devaluation. Asia is not facing the conditions that prevailed in 1997-8.
Yes, we can expect default rates to rise from extremely low levels, with energy companies looking especially exposed. But the risk is priced in, with EM high-yield spreads having blown out around 200 basis points since 2013. It is notable that Asian high-yield spreads have risen just 50bp over the period, at press time.
Emerging markets is an amorphous bloc and individual countries will face downturns, with commodity exposure and current account deficits among the risks to look out for.
But there is no reason to assume an EM-wide crisis, particularly as there appears no reason to expect the US Federal Reserve to hike rates significantly faster than the market is already anticipating.
Other predictions so far: