1. And the currency that matters most to EM investors is…
Vivianne Rodrigues, FT Beyond Brics
The fate of the eurozone topped EM investors’ worries at a recent conference. The investors put much higher odds on a eurozone breakup vs. a hard landing in China. Panellists expect Central Europe to be the biggest EM casualty of the euro turmoil. But not all was gloom and doom as a number spoke bullishly about EM corporate debt.
EM Muser: The CEE region is directly in the line of fire of eurozone turmoil given their strong trade and financial linkages. As I noted in a recent post, the banking sector is a particular worrisome source of contagion as Western European parent banks dominate lending in the CEE region via local subsidiaries. Signs of a credit squeeze are already apparent. (See: Is CEE Better Prepared This Time Around?)
As for EM corporate debt, it’s a growing asset class with high yields and many of the issuers are investment grade. However, caution is warranted. According to Fitch Ratings, issuers in Russia and Turkey could face financing problems in a prolonged global downturn given their limited cash cushions. (See: Bloomberg article)
2. India: Fiscal challenges are opportunities
DBS Group Research
The eurozone crisis and global slowdown have come at a bad time for India. The budget deficit has widened relative to 2008, leaving the government with limited room to use fiscal policy to support growth. DBS believes markets have not priced in these fiscal risks. The government has targeted a budget deficit of 4.6% of GDP for FY2011/12, but DBS says it could be as high as 8.5% of GDP.
EM Muser: India’s public debt load has declined in recent years and is below that in most advanced economies. However, at roughly 70% of GDP, it’s still high compared to other EMs – a point I highlighted in a post a while back. (See: Emerging Markets: Fiscal Health Check)
If the government posts high deficits, it will add to the debt load and could end up weighing on growth and threatening the country’s sovereign credit rating. According to Moody’s, the public debt burden is a major stumbling block that has prevented India from securing an investment-grade rating from the agency.
3. Presentation: Sub-Saharan Africa Outlook
Marion Mühlberger, Deutsche Bank
This presentation provides an upbeat view of Sub-Saharan Africa’s economic prospects and notes the region’s low public debt levels and improved macroeconomic policies.
While Europe remains the region’s most important trading partner, economic ties have grown with Asia, making it the second most important market. The region is very commodity-oriented, but it varies by country. For example, Angola and Nigeria are very oil dependent (90% of more of total exports), while gold is Ghana and Tanzania’s main export. The presentation does warn investors not to be complacent about political risk.
EM Muser: DB’s hopeful growth outlook for Sub-Saharan Africa is shared by the IMF, in its latest Regional Economic Outlook in October and by the Economist magazine. The cover of the December 2nd issue is titled, ‘Africa Rising.’
Nigeria exemplifies the many risks and opportunities in the region. The democratic election of Goodluck Jonathan in the presidential race earlier this year marked a turning point as it was widely hailed as free and fair. Moreover, the country boasts a large, young population (around 154 million), significant oil (OPEC’s 6th largest producer) and the region’s second largest stock market behind South Africa. However, many challenges remain – from violence in the north to regional tensions to infrastructure decay – so investors need a strong stomach.
4. 2011 Corruption Perceptions Index
TI released the results of its 2011 Corruption Perceptions Index, covering 183 countries, on December 1st. The usual suspects – i.e. the Nordics – dominated the top 10. Not surprisingly, Somalia and North Korea came in at the bottom of the rankings.
Source: Transparency International
EM Muser: I created the chart above to highlight the scores of a select number of EMs over the last 3 years. If you’re interested in the score of a country not listed, click through to the TI report for the full results. Among the grouping, Russia continues to be perceived as the most corrupt, with Chile the least corrupt.
I find the underlying trends to be as interesting as the rankings themselves. For example, perceived corruption has noticeably improved in Poland over the past three years, while it has steadily worsened in Hungary, South Africa, Colombia and Mexico.