Emerging market debt outlook: Something old, something new

27 September 2024 (7 min read)

KEY POINTS

Following an agitated but constructive summer, US election jitters are starting to impact emerging markets

A Trump win is generally seen as bad for emerging market debt, as it would likely bring about trade protectionism, leading to US dollar appreciation, a potential currency war with Asia and higher US rates that would hurt frontier markets. A Harris win would be better as it would help avoid such challenges

However, Trump presidency is not a new outcome for markets and Vice President Harris also offers a relevant playbook given her position in the current administration

Does the first Trump presidency offer a useful guide as to what to expect from Emerging Market Debt (EMD) should he win another term?

When we look at the emerging markets’ (EM) environment today, the similarities with the period just prior to the 2016 US presidential election are striking.

In November 2015, Ukraine had just completed its debt restructuring following Russia’s invasion in the previous year and the subsequent sovereign default. In August 2024, Ukraine once again restructured its sovereign debt, after a two-year moratorium on external debt payments.

In 2016, Argentina was having a moment with the Mauricio Macri reformist government which was promising a break from the past. Today we are witnessing another attempt at a turnaround, with Javier Milei’s administration having embarked in an aggressive fiscal stabilisation programme.

Similarly to nowadays, China was struggling with low growth, overcapacity and deflation fears, with the property market in the doldrums.

In addition, Brazil was experiencing both a fiscal and political crisis. Dilma Roussef’s administration pushed the budget deficit to double digits (it peaked at -10.2% of GDP in 2015) and she eventually faced impeachment. Today Lula da Silva’s honeymoon with markets (after his re-election in October 2022) seems to be over, with the 2024 projected budget deficit at -10% of GDP again.

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