Emerging-market countries will enter new territory next year. For the first time since the asset class was established in the late 1980s, these nations will become net creditors in the global economy, according to data from Fitch Ratings.
At a time when the US has a record current account deficit, one-third of the 68 emerging-market countries rated by the agency are already net external public creditors. This has been largely spurred by higher commodity prices, especially for oil, a build-up in foreign exchange reserves and better macroeconomic management.
The data is the latest to show that the asset class is at its healthiest for a number of years. Credit fundamentals, for example, have improved to the point where more than 40% of Fitch-rated emerging markets now enjoy investment-grade status. Three-quarters have an international liquidity ratio of at least 100%.
Is this, then, the start of a new era? Have emerging markets finally matured? Is the term becoming irrelevant, even redundant?
The short answer to all the questions is no. Cynics are still not convinced that the asset class is benefiting from anything more than an upturn in commodity prices and market liquidity. Certainly, they argue, a risk premium over US treasuries of about 3% is unjustified.
Analysts at research firm CreditSights, for example, reckon that many of the recent improvements in emerging markets’ fundamentals “may be cyclical in nature”. What’s more, they continue, some of these fundamentals, such as current account and fiscal balances “are beginning to deteriorate and will probably worsen (albeit from a relatively healthy level) next year as well”.
Some regions are faring better than others. The vast majority of developing countries that are net creditors are in Asia, with China leading a pack including Korea, Taiwan, Malaysia and Singapore. These nations have built up huge reserves, have current account surpluses and still believe in a strong dollar, even if the US no longer does.
In Latin America no country is a net creditor, although almost all countries are improving their balance sheets. Brazil, for example, had a net foreign debt-to-exports, goods and services ratio of more than 300% in 1999. This year it will drop to below 100%.
The region, however, still has two times the level of foreign debt of emerging Europe, where only one country, the Czech Republic, is a net creditor (although Russia and Kazakhstan are poised to reach the milestone within the next year, especially if the oil price stays at $50 plus).
What is worrying for the emerging markets is that those countries with the highest net external debt and the lowest liquidity ratios are among the biggest members of the asset class – Brazil, Turkey, Argentina, Indonesia, Uruguay and Ecuador.
Their reliance on foreign borrowers could be put to the test when the global imbalances begin to unwind. If a disorderly adjustment takes place, that could lead to a spike in global interest rates, possibly making it prohibitively expensive for these countries to borrow in the international capital markets.
So although it’s right that the advances made by developing countries should be celebrated and that these nations are better placed to handle a crisis than they were a decade ago, it will still be a few years before the term “emerging markets” becomes obsolete.
