During periods of external shock like the Global Financial Crisis (2008) or COVID-19 (2020), the macro variables that impact EM sovereigns can change suddenly and dramatically, necessitating a rethink of our credit views. We believe that the recent shift in U.S. policy could be another such shock causing serious implications for the more vulnerable countries, while others prove to be more resilient. As we have learned from past events, it is an effective strategy to position more heavily in resilient names through the worst of a crisis, looking to reverse the trade later as the cycle begins to turn, and the risk factors become clearer for more vulnerable names.
To determine the resiliency of all 80 EM sovereigns under our coverage fully and expeditiously, we designed the following scenario and analytical parameters:
- The shock scenario – While this is not our base case, we could envision a global recession lasting as long as three to four quarters and driven primarily by weakness in the U.S. and China, with Europe also weak but comparatively less affected. Weak global demand would put downward pressure on commodity prices, particularly oil, with Brent crude sustaining depressed levels of $50 – $60 for this extended period.
- Analytical parameters – At a high level, we define resiliency as a country’s ability to endure the entire downcycle while avoiding significant credit rating downgrades and funding difficulties. We considered three additional criteria that are particularly relevant to this specific shock: 1. direct exposure to U.S./China economic malaise; 2. direct impact from lower oil prices; and 3. significant increases in funding needs directly owing to the shock.
You can now read the full whitepaper at the link below
