Credit Data Anticipates Emerging Market Stresses

Last week, the FT reported on recent signs of stress in Emerging Markets.  These include weakness in a number of key currencies and stock markets, and increasing local currency yields for Sovereign bonds. Rising yields can compensate, in part, for currency losses; but investors usually need to see a currency floor being established before they take advantage of higher rates.  The chart below shows the credit distribution and trends for 90 Sovereign governments in the Emerging and Frontier economies.

A surprisingly large proportion (nearly 40%) are Investment Grade, although the most recent data shows an increase in the proportion in the “tails” of the distribution (i.e. CBC* categories aa and c have both increased).  The time series chart below shows an improvement in credit risk in the latter half of 2016, but credit has been deteriorating ever since with a particularly sharp decline in early 2018.  This predates and confirms the recent warning signals in currency, equity and bond markets.

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Credit Benchmark brings together internal credit risk views from over 40 leading global financial institutions. The contributions are anonymized, aggregated, and published in the form of consensus ratings and aggregate analytics to provide an independent, real-world perspective of credit risk. Risk and investment professionals at banks, insurance companies, asset managers and other financial firms use the data for insights into the unrated, monitoring and alerting within their portfolios, benchmarking, assessing and analyzing trends, and fulfilling regulatory requirements and capital.