Asia could be the next problem for financial markets
Get the Full StoryREUTERS China DailySovereign credit ratings of the emerging market countries have dropped sharply to "junk" and have reached the lowest range since the Financial Crisis.
Investors were induced to invest in EMs by scanty returns in Developed Markets, excess central bank liquidity and the perception that EMs have made the necessary structural changes to their economies.
Asia’s dollar-denominated debt, relative to its foreign exchange reserves and exports, has risen significantly since 2009.
As the tide of excess liquidity recedes, EMs including Asia and Africa will begin to pay the heavy price of the misallocation of credit.
“Excess liquidity usually leads to the misallocation of capital, masking any balance sheet constrains. As this tide of excess liquidity recedes, it reveals the misallocation of capital and the mispricing of risk,” Nedbank CIB strategists Neels Heyneke and Mehul Daya write in a note. And this is particularly the case for excess dollar-liquidity in the Emerging Markets EMs .
Sovereign credit ratings – such as those issued by Moody’s, Standard & Poor’s, and Fitch – of the emerging market countries have dropped sharply since late 2016. In Aggregate, they’re now solidly into “junk” below investment grade and have reached the lowest range since the Financial Crisis. Yet, despite the rising risks, “investors have allocated large amounts of their portfolio allocations to EMs relative to Developed Markets DMs .”
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