EM debt relatively unscathed by coronavirus – so far


Thus far, emerging markets debt has been relatively unscathed by the coronavirus, driven by expectations that the impact on growth will be temporary, and that central banks will intervene with lower rates.

The Emerging Markets Debt team at Eaton Vance, a global investment manager, notes: Obviously, the risk to EM debt will likely grow if the severity of the pandemic increases, and more uncertainty is priced into the market.

In terms of what we know about the spread of the coronavirus, the latest news has been mixed. In China, sentiment has changed, and reactions have been more geared toward restarting the economy to try and avoid mass unemployment. China reported zero new cases outside of Hubei province on Sunday, and a number of provinces lowered their emergency response measures. There is the possibility that officials are understating cases and lifting measures prematurely to get the economy back on track.

Outside of China, new cases have been growing, with a 27% increase in the past 24 hours, excluding the cases on the Diamond Princess cruise ship. Many of the cases on rise in South Korea, Iran and Italy have no known connection to China. Italian authorities have shut down schools, universities, museums and many other public areas in the northern region of the country in response.

The longer-term impact on EM countries will likely depend on their economic ties to China. For example, in Southeast Asia, countries that are part of the Chinese manufacturing supply chain could face a slowdown. Additionally, many Asian countries will be affected as tourism from China likely declines. More broadly, commodities exporters globally will be hit as commodity prices fall due to reduced demand from China. Likely examples include exporters such as Chile, Saudi Arabia and Brazil.

On the other hand, countries like the Dominican Republic and Mexico that have fewer direct economic ties to China and import commodities may do better, as falling import prices are a boost to their economies.

Our overall view is that the virus is more widespread than has been reported, meaning there is still a vast amount of uncertainty. Stocks are falling in response, and oil continues to take a hit as demand falls. We believe global supply chains will be disrupted more than originally anticipated, especially given the surge in new cases outside of China.

Until the world gets a better handle on the specifics of the coronavirus, uncertainty and caution will drive the impact on emerging markets and the rest of the global economy. The emerging markets debt team will be monitoring the situation closely and sharing our views with you as they take shape.

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