EM fundamentals timidly improving - SocGen

Régis Chatellier, Research Analyst at Societe Generale, suggests that the EM fundamentals have tended to improve, although with substantial disparities.

Key Quotes

“Growth is ticking upward driven by Asia; industrial production in Russia remains resilient, while the recession in Brazil seems to have bottomed out. EM external balances continue to improve, except in most part of Latin America. The depreciation of EM currencies has mechanically induced a deterioration of external debt/GDP ratios, but the amount of external debt, in dollar terms, has actually decreased.

Growth is picking up, although with substantial disparities

Growth in EM has been picking up since the beginning of the year: it reached an estimated 4.3% (yoy) in June 2016, versus 4.1% in December 2015. Excluding China and India, EM growth was only 1.3% (yoy) in 2Q16, but this was a very significant improvement from the 0.6% lows of 4Q15.

External balances have improved, except in Latin America

The 2Q16 numbers are not available just yet for all emerging markets, but based on the main countries we find that external balances continue to improve, except for most part of Latin America. As of June 2016 the Chinese current account surplus represented 2.4% of GDP, down from 3.2% a year ago, although still standing at a comfortable level. If we exclude China and India, the trend since 2014 is very positive: the aggregate EM current account deficit reached an estimated 0.5% of GDP in 2Q16, versus 1.0% in 2Q15 and 2.0% in 2Q14.

The external debt decreases, but the debt burden has tended to rise

The amount of external debt (EXD) has been decreasing: based on a sample of 45 EM countries, the aggregate amount of EXD was $8.7tn as of 1Q16, down from the peak of $9.2tn of 2Q15. However, the EXD/GDP ratio has tended to rise due to the depreciation of EM currencies – the latter having adverse impact on GDPs when valued in US dollar terms. The latest data show that the aggregate EXD/GDP ratio has risen to 24% of GDP, and even 47.1% if we exclude China and India. These levels, however, are well below that of developed markets (230% on a single average basis).

On balance, EM fundamentals have tended to improve, even though Latin America is clearly lagging. The gradual recovery of the current accounts may be the most outstanding development, as this was precisely a major weakness pointing out by investors during the 2013 global sell-off. The control on external funding has also to be praised. Among the major EM countries, only Turkey has a significant weakness in that respect, in our view.”