Emerging market sovereign debt dynamics are worsening

Summary

While emerging currencies have performed well overall so far this year, in our view underlying vulnerabilities across the emerging world are building, particularly in the sovereign debt space. Following a few years of somewhat stable debt-to-GDP ratios, the IMF now forecasts sovereign debt burdens across emerging markets to start rising at a quicker pace, with the debt burden for emerging markets in particular moving in a more worrisome direction. In addition, the cost of servicing this debt burden has risen substantially for emerging economies since the global financial crisis, and is expected to get significantly more expensive this year. For now, we highlight worsening debt dynamics as a vulnerability, and a potential risk to our constructive emerging currency outlook.

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