"Perfect storm" over emerging markets
$50 billion have been pulled out of emerging market bond funds in 2022 as the soaring global inflation, reversal of quantitative easing by central banks in developed countries and the crisis in Ukraine combined to produce a "perfect storm," the Financial Times (FT) reported.
While the flight from emerging market assets heralds a darker future for economies of countries like Turkey, the net outflows from emerging market fixed income funds are the most severe in at least 17 years, according to FT report.
The shift away from emerging market bonds have pulled asset prices sharply lower in the first half of 2022. The JPMorgan EMBI Global Diversified, the benchmark index of dollar-denominated emerging market sovereign bonds, delivered total returns of minus 18.6 percent in 2022.
The Federal Reserve's recent interest rate hikes, and plans for more in the coming months, are likely to have a particularly negative impact on emerging markets, since the fixed returns investors can earn from holding ultra-safe US debt have increased through such rate hikes, eroding the appeal of bonds sold by issuers in emerging markets with weaker credit profiles.
FT report also notes that while some commodity-exporter developing countries have benefited from the rise in commodity prices that has been triggered by Russia's invasion of Ukraine, this is not the situation for Turkey.
"Big energy importers such as Turkey are facing a severe blow from the rising cost of raw materials such as oil," the report says. "Since most commodities are priced in dollars, a weakening of emerging market countries' currencies against the greenback amplifies these cost pressures."