Risks in Emerging Market Bonds
LOS-discuss risks faced by investors in emerging market fixed-income securities.
discuss the country risk analysis techniques used to evaluate emerging market economies
Investing in emerging market debt:
Notes:
(1) economic(ability to pay) ;
-Emerging market economies have characteristics that make them more vulnerable to economic distress and less likely to be able to pay their debts on time or in full.
-These characteristics include greater concentration of wealth and income, a less diverse tax base, dependence on specific industries (especially cyclical ones), restrictions on trade and capital flows, poor fiscal controls and monetary discipline, less educated and skilled workforce, limited physical infrastructure, reliance on foreign borrowing, and small/less sophisticated financial markets and institutions.
-The history of a country’s past crises and how they were handled/resolved should be examined, including instances of sovereign defaults, debt restructuring, fiscal challenges, inflation, and currency instability.
-Key indicators to assess the health of the macroeconomy include the ratio of fiscal deficit to GDP (persistent ratio above 4% is a cause for concern), debt-to-GDP ratio (exceeding 70%–80% is a sign of vulnerability), annual real growth rate (less than 4% suggests slow or no catch-up with advanced economies), current account deficits (greater than 4% of GDP indicate lack of competitiveness), foreign debt (greater than 50% of GDP or 200% of current account receipts is risky), and foreign exchange reserves (less than 100% of short-term debt is risky).
-Access to support from international agencies like the IMF and World Bank should be considered as a potential external support mechanism for countries in distress.
(2) political and legal(willingness to pay)；
-Investors in emerging market debt face risks related to the enforcement of their claims and the recovery of their investments.
-Weak property rights laws and weak enforcement of contract laws are concerning factors that can hinder the ability to enforce seniority structures within private sector claims.
-Sovereign immunity makes it challenging to compel a sovereign borrower to repay its debts.
-Hazards such as confiscation of property, nationalization of companies, corruption, and political instability caused by coalition governments are relevant risks.
-Capital controls or restrictions on currency conversion can make it difficult or impossible to repatriate capital.
-Historical factors can provide insights into the severity of political and legal risks.
-Questions to consider include the history of nationalization, expropriation, and property rights violations, how international disputes have been resolved, the integrity of the judicial system, stability and legitimacy of political institutions, peaceful transfer of power, and the resilience of political coalitions under strain.
13 Jul 2023 - Original by toptradeready.com