With the IMF/World Bank Annual Meetings being held this week in DC (see our preview report here), we have assessed the state of the world in 2022 and what the outlook holds for investors. Click on the "Download report" button for our full presentation.
EM bonds (and risk assets in general) have had a difficult year amid the twin external shocks of war and rates. Recession fears have increased but, for now, inflation remains the priority, which is likely to keep rates elevated for longer.
Sovereign hard currency bond issuance has been subdued due to the rise in borrowing costs. Issuance stands at US$68bn ytd, less than half the pace of last year, and HY has ground to a halt.
Many frontiers and smaller EM have lost access to the market. Nearly 40% of countries in the index have a yield of 10% or more.
The tightening in EM financing conditions raises refinancing risks amid large financing needs and higher public debt burdens. This will force more countries into the arms of the IMF, or they will need to look elsewhere for help and/or undergo painful domestic adjustments.
Debt restructuring is unavoidable for some but, so far, sovereign defaults remain limited and isolated. We do not expect a systemic EM crisis, but Common Framework reforms are needed to deal with likely consequences.