Macroscope | Resilient debt markets belie talk of a “perfect storm” for EMs

When it comes to emerging markets (EMs), there is no shortage of issues for international investors to fret about.

The latest development to roil markets was the highly unexpected decision on Tuesday by China’s central bank to devalue the renminbi by nearly 2 per cent - the sharpest adjustment in two decades - in a thinly veiled effort to stimulate the country’s sagging economy.

The move put further strain on equity, currency and commodity markets and sparked fears of a more intense and destabilising battle in global foreign exchange markets in which countries have been intentionally weakening their currencies to boost their exporters’ competitiveness. On Wednesday, Vietnam’s central bank widened the trading band for its own currency, the dong.

Over the past three months, EM stocks have been hammered, falling 12.5 per cent (compared with a 2 per cent decline in the benchmark US S&P 500 index), with Chinese and Brazilian stocks performing the worst. According to JP Morgan, EM equity funds suffered outflows of nearly US$3 billion last week, taking this year’s total redemptions to nearly $21 billion.

EM currencies, moreover, are under severe strain. The devaluation in the yuan caused the sharpest two-day sell-off in Asian currencies since the region’s financial crisis in 1997-98. The Malaysian ringgit - already under pressure because of the renewed decline in oil prices - has fallen more than 5 per cent against the dollar since the beginning of this month while the Indonesian rupiah is trading at its weakest level since 1998.

Commodity-rich developing countries with weak fundamentals have suffered the steepest falls in their currencies. The Russian rouble and the Brazilian real have dropped 30 per cent and 16 per cent respectively since mid-May.