The evolution of emerging market economies

Historically, emerging markets (EM) were considered high-risk due to their economic instability. However, several fundamental changes have contributed to a shift in this perception. First and foremost, many EM have substantially improved their fiscal positions by reducing their fiscal deficits through disciplined budget management and revenue generation. According to data from Bloomberg, EM had an average deficit of -2.6% from 2000 to 2022, compared to -3.4% for Developed Economies. This has resulted in a decreased reliance on external financing. IMF data shows that external financing for EM has decreased from a high of 50% in 1989 to an anticipated level of 28% by the end of 2024. Additionally, many EM have seen a significant reduction in current account deficits, driven by a combination of increased exports and reduced imports. Thailand serves as a good example, with an average current account surplus of 3.4% from 2012 to 2022 (IMF). The country has benefitted from a rise in manufacturing exports and its strong tourism sector. This shift has made their economies more resilient to sudden capital outflows.

Source: BlueOrchard, Bloomberg, IMF

Finally, structural reforms in areas such as banking, labour, and trade have resulted in improved governance and increased economic stability in many EM (IMF). These reforms have enhanced the business environment and promoted economic growth. A study by the IMF has shown that well-calibrated reforms, particularly those addressing governance, business regulation, and external sector constraints, can have a significant positive impact on economic growth, boosting output by 4% in two years and 8% in four years, even in the presence of limited policy space. Uruguay is one of the countries in Latin America that has implemented various reforms in recent years, adjusting its fiscal framework and introducing a pension reform that improves the sustainability of the system (Fitch).


Improved credit fundamentals in emerging markets

The credit fundamentals of companies in emerging markets have significantly improved in recent years. In the corporate sectors, there has been a noteworthy decrease in leverage for hard currency bond issuers. This makes companies less vulnerable to economic shocks and more appealing to investors. An analysis from JP Morgan in August 2023 of over 200 corporate issuers shows that Net Leverage decreased from a peak of 2.1x in 2016 to a moderate level of 1.2x in June 2023. Furthermore, the Interest Coverage Ratio has improved and is currently at a high level of 9.3x. These enhanced credit metrics provide companies with an adequate buffer to face increased refinancing costs in the coming years. Financial institutions have also improved asset quality and capital adequacy through reforms across countries. According to S&P data, the Regulatory Capital Adequacy Ratio across EM improved from 16.6% in 2012 to 20.8% as of FY22.

Source: BlueOrchard, JPMorgan

Source: BlueOrchard, S&P


Understanding EM risks in the current economic climate is imperative for making informed investment decisions. The transformation of EM economies and the improvement in credit fundamentals have led to a shift in the risk profile of these markets. Factors such as decreased corporate leverage, improved capitalisation of financial institutions, and overall economic stability have all contributed to this change. However, dispersions across markets remain high, underscoring the importance of closer examination and active management in this environment.

– ends –

Any reference to sectors/countries/stocks/securities are for illustrative purposes only and not a recommendation to buy or sell any financial instrument/securities or adopt any investment strategy.

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