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| Emerging
markets left vulnerable after attack 17th
September, 2001. All emerging markets are suffering the impact of last week's attack on the US. But the real cost will not emerge until they need to return to the capital markets to refinance borrowings. This need will be more urgent for some than for others. Already there is evidence that emerging countries' debt is out of favour with investors. Trading volumes in emerging market debt are at one-third of normal levels. Risk aversion has clearly increased, according to Joyce Chang, head of emerging markets research for JP Morgan in New York. The spread between US treasuries and EMBI+, JP Morgan's emerging markets index, has widened by 81 bp since last Tuesday and is expected to widen further this week. Spreads for Argentine debt widened by 124 bp, followed by Nigeria, Turkey and Brazil, which have widened by more than 100 bp. This is less than the damage done in other sectors. Debt of airlines, for example, has been badly affected by Tuesday's attacks. JP Morgan says the main reason why emerging markets sold off less than other assets classes is that investors "had gone into this tragedy with defensive positions". In the fall-out from the events, however, countries in Latin America with close links to the US economy, such as Mexico, are among the most vulnerable. Rising commodity prices could also be damaging to all emerging economies which import oil. Countries with weak credit ratings are likely to be affected more than countries with stronger fundamentals. However, one of the key risks in emerging markets as an asset class is the ability of the emerging economies to refinance maturing debt in the coming six months, according to Philip Poole, chief emerging markets economist at ING Barings. At best, the cost of accessing markets would go up for most countries. At worst, the events in the US could shut the markets to emerging markets borrowers for an extended period. "This would then raise the risk of falls in international reserves and a need for emerging markets governments to cut fiscally as maturing bonds are repaid rather than refinanced, with consequent implications for growth," Mr Poole says. It could also increase concerns about the risk of default. Turkey and Argentina have the lowest credit ratings among the countries with the most exposure to refinancing risks. Both are rated B- with a negative outlook. However, Turkey is most vulnerable not only because of its geopolitical position and high oil imports, but because it has one of the highest refinancing requirements with $2.2bn worth of bonds falling due by the end of March 2002. Kemal Dervis, Turkey's economy minister, said on Monday that an international bond issue planned for September may be postponed as a result of the attack. Turkey's bond repayments are concentrated in November and December. In addition to maturing bonds, Turkey also has significant payments falling due on syndicated loans taken by Turkish institutions, which takes the total refinancing requirement to $6.4bn, equivalent to about 30 per cent of this year's projected international reserves, according to ING Barings. A potential loss of revenues from tourism could make this situation worse. One of the safer emerging markets, at least in the short term, is Russia. Although it has a $1bn international bond maturing in November, the government has repeatedly said it did not need to borrow in the international capital markets to repay the bond. Russia's limited trade links with the US - about 7.7 per cent of exports - and the fact that its economy is dominated by oil and metals which are rising in price, make it one of the favourite investments in emerging markets universe. "Russia remains our largest overweight recommendation due to the continued strong bid from local investors and its solid external position," JP Morgan says. Russia also remains one of the more liquid emerging markets, which investors consider to be a premium at the time of turmoil. |
