Debt markets in emerging economies

By Maureen Aylward
The debt crises in the US and Europe has created uncertainty in global debt markets. Are emerging countries a better choice? We asked our Zintro experts to tell us what is behind the interest in emerging countries as a less risky choice than the US or Europe.

SJC, an expert in investment banking in emerging markets and debt capital markets, thinks that the answer lies in the fact that global macroeconomic fundamentals have and are continuing to change at an unusual pace as the developing world’s (and in particular Asia’s) share of global GDP growth rises to new heights. World Bank figures for 2011 show forecasts of 2.5 percent for OECD nations and 6 percent for developing nations, and more fundamentally, a forecast of 50 percent of global GDP growth coming from the latter segment.

“Tying this macroeconomic trend to global debt markets leaves us with the reality that developed countries, including the US and Europe, have effectively become over-leveraged. Furthermore, with declining growth rates and ageing populations, the potential to be caught in a downward debt spiral remains high particularly for some nations,” says SJC. “Emerging markets, while not a single homogenous group by any means, are benefitting from industrialization, greater access to trade, and younger population dynamics, which in turn has ensured many have national saving rates far beyond those found in the US or Europe. In addition, many emerging markets still do not have advanced capital markets, which has largely been a constraint yet has also ensured that by and far many have remained protected from vagrancies of the international bond markets.”

SJC believes the shift toward emerging markets is part of larger and longer term shift toward a rebalancing of the global economy from a US/Europe centric one to a more multi-polar one. “The current and projected growth rates of developing countries in tandem with still favorable premiums attached to a risk profile definitely make them a current and short term bet for investors, but I can see this premium declining in the long-term,” he says.

Eric Eaglin, a management consultant and CEO, says that due to the uncertainty in US and European markets, sustained economic trends in emerging markets appear less risky and thus more attractive for private investors and commercial enterprises seeking stable investment opportunities. “The seemingly political certainty and rate of social and technological advances in many emerging markets offer optimistic variables previously evident in US and European debt markets,” he says.

George Elstein, a futures and options trading and hedging strategist, says that the ongoing economic malaise that we in the US and Europe find ourselves currently trudging through is the hangover from a prolonged affair with increasingly loose credit and easy money over the previous several decades. “While the US was leveraging and collateralizing home current and future appreciation, future income, corporate receivables, and other utilizable assets, we were steadily outsourcing production and services to the developing BRIC countries that were building infrastructure and wealth in the process,” says Elstein. “A new, proper balance for Western economies is still elusive. Europe’s issues are compounded by the fact that there are independent states pushing and pulling at the stability of the Euro and a Central Bank but no true centralized government or discipline. Although the US dollar and the Euro remain key trading currencies for world commerce, the emerging countries, like China, Brazil, and India, where organic growth is still humming despite the world’s issues, make for tremendous opportunities for investors, speculators, entrepreneurs.”

Elstein says that China has experienced rampant real estate speculation and there will be a day of reckoning for the last holders of overpriced commercial property there, but after a few years of readjustment, the economic engine that burns at the heart of that country will quickly re-establish a pattern of GDP growth. “The young economic nations, the newest capitalists, have the greatest chance for recovery and growth,” he says.

Rosina Hinojosa, a health economist, says that emerging countries are better choice. “Latin America, for example, had a big crisis ten years ago, and now the economies of countries such as Peru, Chile, and others are very attractive for investments. They skipped the crises and are now in a bull market,” she says. “In Peru, for example, we used to have hyper inflation, but now the economy is healthy.”

Our experts would love to hear from you!  Post your question for Debt markets experts here.  Are you a subject matter expert?  Sign up as a Zintro expert to start generating free leads for your business.