Each week, the Economic Research Department of BNP Paribas reports on economic news.
- Oil prices rebound
- Currencies pick up
- Risk premiums decline
A wind of optimism has been sweeping the emerging markets since March: portfolio investment flows, bond issues and exchange rates have all picked up, while risk premiums have declined (see chart). The international environment has certainly evolved somewhat more favourably in recent weeks (rebound in commodity prices; coordination of monetary policies to avoid a currency war). However, nothing fundamental has changed radically since the end of 2015. Growth continues to slow in China despite fiscal and monetary stimulus, the Brazilian political crisis is worsening and Russia remains mired in recession. Country risk is rising in a diffuse manner. First to come to mind is security risk with the increasing number of terrorist attacks. Next is sovereign risk, with the growing financing needs of the oil-producing countries, even though sovereign funds should serve as shock absorbers (Saudi
Arabia, Russia). Lastly, there is credit risk: dollar-denominated private debt has increased sharply in recent years, and emerging currencies have depreciated massively against the dollar. In 2015, according to S&P, corporate defaults in emerging countries reached a 6-year high, and they are bound to multiply, at least in commodity-producing countries. According to BIS data, the debt of nonfinancial companies in emerging countries continued to swell to 100% of GDP at year-end 2015. They will face very high debt repayments for bonds and syndicated loans through 2018.
François Faure
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