Although recent increase in global debt has been due to emerging debt, the emerging debt market is struggling, fighting against a number of factors including questionable creditworthiness of certain countries. In fact, emerging markets experienced a 98% drop in the third quarter from the second, resulting in a net lackluster $1.5 billion in issuance.
Much of decline has been due to the unexpected devaluation of China’s Yuan and a 40% fall in commodity prices since 2011. Additional factors include the country’s’ high inflation and high currency volatility. One example in particular includes Brazil, whose economic turmoil and double-digit inflation has led its downgrade to junk bonds in September.
With the number of challenges already present, an increased in Fed rates – expected to happen at the end of the month – may put the emerging market debt levels at an even greater risk. Investors seeking higher yield have already increased their outflow of money into safer countries like the U.S. Likely, they will continue to do so, further tightening the availability of funds in those emerging markets.
By: Taruna Manni