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Did Covid support measures sow the seeds of the next EM crisis?

Appetite for emerging market risk is much lower in the wake of Covid-19 than it was after the global financial crisis. This is the result of a mix of technical and fundamental factors, but it is primarily driven by the spectre of the emerging markets’ Achilles heel: inflation.


“Real rates making new lows at this stage of the cycle is really quite curious and I’m always nervous when I feel that I don’t understand the reason for a move – the market is smarter than anyone – so I am a bit nervous.”

Dirk Willer, managing director and global head of emerging market FX and fixed income strategy at Citi Research, was revealingly frank when he spoke to Euromoney over the summer about the profound impact that US rate uncertainty is having on emerging market (EM) economies.

“The fact that almost everyone is expecting rates to rise, and maybe sharply, in the US is partly what’s holding back capital flows into EM,” he explains. Speaking in early August, he adds: “If you had told me that real rates in the US would be where they are right now, I would have certainly expected larger inflows into EM in the last couple of weeks.”

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Rob Dwyer is Latin America Editor. He has been a financial journalist since 1997 and has worked in London, New York and Sao Paulo, Brazil, where he is now based.
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