Emerging Markets
Emerging market debt: three months into the crisis
Kirstie Spence
Fixed Income Portfolio Manager
  • We still believe that there is good value across a range of emerging market (EM) debt assets – in absolute terms and relative to other fixed income asset classes 
  • Emerging market debt is unlikely to face a broad EM debt crisis, at least in the next couple of years 
  • Emerging market debt should benefit from the massive liquidity spill-over as lower risk assets become more fully valued. Meanwhile, a global growth recovery would be positive for EM

How has COVID-19 impacted emerging markets? 

The virus has spread rapidly through most countries in the world, including emerging markets (EM). The actual number of cases is likely to remain unknown as testing is harder to deploy in EMs than in developed markets (DM), but what we do know now is that the appetite in EM for total lockdown and the ability to implement and monitor it, is also low. EM governments face a trade-off around the social and economic costs of trying to control the virus, versus the impact on the population’s health from the virus.

This is likely to have two main effects. Firstly, virus-induced recessions will probably be shallower in EMs than DMs. The steepest recessions we are seeing are in the countries with the most stringent, longest and belated lockdowns. The second outcome, which is more speculative, is that EM countries may learn to live with the virus more effectively, but they are unlikely to bring it ‘under control’. If herd immunity is the answer, and if actual death rates from the virus in the vast majority of EMs are lower, living with it until there is a vaccine will be accepted. This has been a common path with other communicable diseases many of these countries face all the time. Accepting this also lessens the depth of the recession. 


Does this mean that EM countries avoid such severe recessions? 

Not necessarily. The cost of attempted lockdowns, the shutdown of global trade and the lack of investment are all very costly and directly impact EM countries.

The countries that should be more resilient are those that are more closed and less exposed to the global trends. Ironically, many of these are the poorer/more frontier-type economies.

The question then becomes the economic recovery. The bear case scenario is that recessions in EM countries end up being deeper and longer than we expect, which could cause a decline in potential growth. This can happen when private investment is cut, human capital gets eroded (as unemployment rises) and international trade falls, all of which would affect productivity negatively. The retreat from globalisation that was already happening before the virus could also be accelerated. 

Most EM countries have announced monetary and fiscal stimulus programmes, which makes sense from a growth perspective, even if there are concerns about the implications for debt for some countries. A bull case scenario would be if EM countries were to focus fiscal stimulus on infrastructure and long-term projects, which would actually turn out to be the growth boost that many EM countries need. In more ‘normal’ circumstances, there is a great deal of caution around debt and borrowing, as well as prescriptive International Monetary Fund (IMF) style fiscal prudence that the markets focus heavily on; but for now, many EM countries are facing a window of opportunity to carry out some long overdue, large-scale infrastructure projects.


Risk factors you should consider before investing:

  • This material is not intended to provide investment advice or be considered a personal recommendation.
  • The value of investments and income from them can go down as well as up and you may lose some or all of your initial investment.
  • Past results are not a guide to future results.
  • If the currency in which you invest strengthens against the currency in which the underlying investments of the fund are made, the value of your investment will decrease.
  • Depending on the strategy, risks may be associated with investing in fixed income, emerging markets and/or highyield securities; emerging markets are volatile and may suffer from liquidity problems.

Kirstie Spence is a fixed income portfolio manager who specializes in emerging markets debt. She has 27 years of investment experience (as of 12/31/2022) and holds a master's degree with honors in German and international relations from the University of St. Andrews, Scotland.

Past results are not a guarantee of future results. The value of investments and income from them can go down as well as up and you may lose some or all of your initial investment. This information is not intended to provide investment, tax or other advice, or to be a solicitation to buy or sell any securities.

Statements attributed to an individual represent the opinions of that individual as of the date published and do not necessarily reflect the opinions of Capital Group or its affiliates. All information is as at the date indicated unless otherwise stated. Some information may have been obtained from third parties, and as such the reliability of that information is not guaranteed.