Currently, there is substantial variation in fundamentals among individual countries. For example, there is deflation in Eastern Europe, but inflation in Latin America. Meanwhile, many Asian countries have current account surpluses (in simple terms, exports and net foreign income exceed imports), while some Latin American economies confront substantial deficits.
Political and geopolitical developments add another aspect to divergence, as amply demonstrated in recent years. Consider Russia, for instance. In terms of fundamentals, Russia is a solid credit — running a current account surplus, a low level of outstanding debt and modest refinancing needs. However, the military conflict in Ukraine, the annexation of Crimea in 2014 and the ensuing international sanctions have had a meaningful impact on Russia’s economy, currency and bond market. Investor confidence took a further hit as the price of crude oil (a major Russian export) began to plummet in July 2014 — prompting the ruble to hit an all-time low against the dollar and bond yields to jump higher.
Lower energy and commodity prices have also highlighted structural weaknesses in other emerging economies. In Brazil, the outlooks for growth and inflation have worsened amid declining prices for key exports such as oil, iron ore and soybeans. Meanwhile, the Ghanaian government’s finances are under intense pressure and rating agencies have warned that further downgrades are possible given Ghana’s substantial budget gap and deteriorating growth.
Bright Spots and Some Challenging Near-Term Outlooks Among Major Credits 2015 Consensus Forecasts for a Selection of Larger EM Economies (as of June 15, 2015)