Dark clouds are gathering above the emerging markets.

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Interview with ”Chief Investment Officer Magazine” on May 11, 2020

Dark clouds are gathering above the emerging markets. The combination of high indebtedness, a strong dollar and economic downturn can put many countries in a tight spot. As an investor, it will be important to look at country by country, says Robert J. Teuwissen, CIO of the asset management company Chelton Wealth in Zug, Switzerland.

In recent weeks it has been somewhat underexposed that many emerging economies (EM) have been hit by the corona crisis at a bad time. In the developing countries, the CIO states, ‘the focus has been more on their own problems and hardly any attention has been paid to the storm that is forming above EM.

After all, ‘Emerging countries will have to deal with the consequences of the recession in the industrial markets, their main prophet markets, and the effect of Covid-19 on their rather weak health care’, Teuwissen claims. And all this comes at a time when 75% of EM countries have larger public deficits, higher foreign currency debt and a four times larger current account deficit than in 2007, when the financial crisis was imminent.

Dollar strength

On the financial markets themselves, however, this has not gone unnoticed, as a lot of money has flowed away from EM in recent weeks, causing huge blows to many currencies such as the Mexican peso (-22% versus the dollar), the South African rand (-20%) and the Brazilian real (-18%).

The flight to the dollar, the reserve currency of the world, reinforces this trend. The high levels of debt and the strength of the dollar are now playing to the detriment of many emerging countries. Whatever happens to the dollar, it affects everyone everywhere. Many countries will struggle to meet their dollar-denominated debts because most do not have many currency reserves. On top of that, imported goods are becoming more expensive and inflationary pressures are increasing’, the CIO underlines.

International institutions

According to Teuwissen, several EM countries could raise their interest rates to do the bleeding, but that would be counterproductive in the current economic situation, especially now that their own economy is struggling and the government is struggling to keep the budget under control. Some countries could consider expansionist measures, but that could increase capital flight.

The pressure on institutions such as the IMF and the World Bank to provide financing and support packages will increase anyway. Among other things, the IMF has already opened new short-term credit lines. Another possibility is capital controls so that the pressure on the currency can be stifled. ‘But many countries are reluctant to do so because this could weigh on their reputations and reduce their attractiveness to foreign investors and investors,’ concludes Teuwissen.

Investor: what now?

And what should investors do now? It is difficult to give unambiguous advice because investors obviously have different objectives. What I can give, however, is that traditionally EM is seen as a single block. However, there are ever-increasing fault lines within the segment. As an investor, it will be important to look at each country, each economy individually and distinguish the differences’.

However, Teuwissen does not rule out the possibility of a second wave of capital outflows and that the pressure on EM currencies will increase again. There is hardly any safety net and the lockdown is therefore more difficult to put into practice. If one is hungry one does not stay at home. There is a good chance that the number of infections will not decrease’.

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