No evidence of systemic crisis

Emerging markets can add the past few months to the unhappy list of sell-offs that have made them less lucrative than US stocks over the past decade. Yet the recent brush with bear market status should not be regarded as evidence of a systemic crisis.

Dollar strength has marked a dividing line between the US and the rest of the world. But the countries whose currencies, bonds and stocks are most affected are those whose problems were already well known and largely self-created.

Last week, the Argentine peso and Turkish lira fell to record or near-record lows. Both economies rely heavily on foreign funding to fill gaps left by budget deficits.

Argentina has deluged credit markets with bonds issued at high yields since 2016, drawing in some $100bn.

Turkey has compounded its deficit and inflation problems with an insistence on keeping rates low. It makes sense that the cost to insure against Turkish default, measured by five-year credit default swaps, should reach a decade high.

There is less logic to falls in stocks and bonds from countries with low levels of foreign currency debt and stronger balance sheets. The sell-off means Thailand’s 10year government bond yield has jumped 20 basis points to 2.8% in the past fortnight, in spite of the country’s current account surplus. Saudi Arabia is benefiting from a rise in oil prices. Yet its 10-year bond yield rose a similar amount.

The argument for contagion also ignores the 5% growth expected in emerging markets in 2018 and efforts to reduce vulnerability by issuing longer-dated debt. The average bond maturity in Mexico is eight years. In SA it is 16. The Bank for International Settlements points out that this exceeds maturities in many developed economies.

The emerging-market sell-off may linger as US growth prompts further rate rises. But it ranks nowhere near the worst five of recent decades. Growth is sustainable. Prices will rebound. London, September 7